Government Analyzes 30 Social Security Changes

Benefit payments from the Social Security trust fund exceeded tax income and interest for the first time in 2010, according to Congressional Budget Office calculations released on Friday. As the economy recovers from the recession, income will again exceed benefit payments until 2016. After that, Social Security payments to retirees will begin to draw on the trust fund’s reserves. Beginning in 2039 benefits will need to be cut by about 20 percent, under current law.

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The CBO analyzed 30 options that could potentially improve the financial stability of Social Security. The proposals include tax increases, benefit cuts, raising the retirement age, and altering cost-of-living adjustments. None of the tweaks reduces initial benefits for people age 55 and older in 2010. Initial benefit changes in the study only apply to those who turn 62 in 2017 or later.

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Some options, such as an across-the-board payroll tax hike or a flat reduction in benefits, would affect all participants proportionately. Other proposals, such as removing the current Social Security tax cap of $106,800 in 2010, would only affect Americans earning above that amount. The way in which Social Security changes are phased in could also impact older and younger generations differently.

[Find out What Social Security's Underfunding Means for Your Retirement.]

Some Social Security fixes could eliminate most or all of the deficit by themselves. For example, increasing the payroll tax by 2 percentage points over the next two decades, cutting benefits for all new recipients by 15 percent, and making all earnings subject to Social Security taxes would each alone wipe out most of Social Security’s projected shortfall. Alternatively, smaller tweaks could be implemented in combination to correct the actuarial imbalance. Raising the age retirees are eligible for full benefits to age 70, indexing initial benefits to changes in longevity, or reducing cost-of-living adjustments would each partially eliminate funding shortfalls. The CBO also considered three policies that would increase benefits for low earners, which would need to be offset with other funding increases or benefit cuts.

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