BOX 6-1

Sustaining the Social Security Trust Fund

The expected date of the depletion of the Social Security trust fund is only one indicator of the seriousness of the program’s problem (see Appendix C). Another important indicator of the program’s financial soundness is its actuarial balance, based on the discounted streams of revenues and spending projected over a 75-year period. This indicator does not show the size of the trust fund at the end of the 75 years. A major Social Security reform—like that in 1983—might achieve actuarial balance during 75 years but still lead to insolvency after that time. However, a low or falling trust fund level (relative to benefits) at the end of the 75-year projection period can signal looming insolvency.

Each reform option discussed in this chapter has been tested against multiple indicators. The estimates show that, under the Social Security trustees’ current economic and demographic assumptions, each of our illustrative reform options finances the program’s costs through the 75-year projection period and results in a positive or near-positive cash flow into and out of the trust fund at the end of the 75-year period.

either a substantial increase in currently scheduled payroll tax revenues, a substantial reduction in currently scheduled lifetime benefits for future retirees, or some combination of the two. Commonly discussed changes to reduce the future growth of benefits include: raising the full-benefit retirement age and the earliest retirement age; reducing the additional benefit percentage for spouses; reducing the postretirement cost-of-living adjustment; increasing the number of years used to compute average earnings; and changing the way initial benefit levels (i.e., at retirement) are calculated so that they grow more slowly than wages for higher earners. Examples of commonly discussed revenue changes include raising additional payroll tax revenue by covering newly hired state and local government workers; increasing the maximum amount of wages subject to payroll taxes; raising the payroll tax rate; and taxing Social Security benefits similarly to private pension income. The options presented are just a few combinations of the many proposed changes within the current program framework that have been made to address the program’s projected shortfalls. For detailed descriptions and analysis, see, for example, American Academy of Actuaries (2007), Congressional Budget Office (2009b), Reno and Lavery (2009), Shelton (2008), and Social Security Advisory Board (2005); the list of the Social Security actuary is particularly comprehensive (Social Security Administration, 2009c).

Some observers also note that an increased share of general federal rev-



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