Heading Toward Social Security Reform

Bruce D. Schobel, FSA, MAAA, CLU, CEBS, Consulting Actuary

Bruce D. Schobel, FSA, MAAA, CLU, CEBS, Consulting Actuary

Editor’s note: This article is an adaptation of the live webinar delivered by Bruce Schobel in 2019. His comments have been edited for clarity and length.

You can read the summary article here as part of the 3rd Qtr 2019 Retirement InSight and Trends Newsletter, worth 1.0 CE when read in its entirety (after passing the online quiz.)

You may also choose to take the full length course “Heading Toward Social Security Reform for 1.0 hour continuing education (CE) credit.

By Bruce D. Schobel, FSA, MAAA, CLU, CEBS, Consulting Actuary

Let’s start with Social Security’s financial status. There isn’t any real news here. For more than 30 years, Social Security’s Annual Trustees Reports have shown a very similar financial picture for the program. The funds have been building up over 36 years, and now they’re going to be drawn down somewhat faster than that. They’ll be exhausted around 2035.

The 2019 Trustees Report came out on April 22, 2019, and mostly looks just like the last 30 reports. Trust Fund assets are very near their peak of three trillion dollars. For Social Security, it’s not so much because the program pays out almost a trillion dollars a year.

Starting in 2020, the Trust Fund assets will begin declining because the outgo will exceed the income. It is estimated that the Trust Fund will be exhausted in the year 2035; it could be 2034 or 2036, but it’s around 15 years from now.  That’s really not so far away in the context of retirement planning.

What Happens When the Trust Fund Is Exhausted?

Do they get a turn out the lights and lock the door and walk away?

If there’s no money in the Trust Fund to act as a contingency reserve, then the government will be unable to pay full benefits on time. The Social Security program will continue to operate and take in tax income that will be sufficient to cover only about 80% of the benefits to be paid.  The 80% funding of benefits will decline gradually over time because the outgo will continue to grow faster than the income. A couple of years later, benefits will be 79% funded, then 78%, 77%, and so on.

Congress will need to either raise revenue or lower the outgo. There really aren’t any other options. Something needs to be done before 2035 if they want to pay full benefits on time. It’s cliché, but it’s actually true in this case, that if they act sooner, they have a lot of options available that aren’t available if they wait until the last second. For example, raising the normal retirement age, which was last done in 1983. It took effect in the year 2000, so there was a 17-year notice. They won’t raise the normal retirement age for people who are about to retire the next day or the next year.

If Congress waits until 2034, the only options available will be raising taxes or changing benefits for people in payment status. These are not something that has ever been done before, with a minor exception of changes to college student benefits in 1981.

Historical Reform Efforts

The last major legislation affecting Social Security was the Social Security Amendments of 1983 Public Law 98-21, signed by President Reagan on April 20 of that year.

The Trust Funds were about to run out of money on July 1 of that year, so they passed this law with ten weeks to spare. That’s sort of like driving right up to the edge of the cliff and not going over.

There aren’t many examples of legislation that has worked for 36 years without a need for significant Amendment, but the Social Security Amendments of 1983 actually did that. That legislation produced a financial build-up and drawdown that we have been watching for 36 years, and we’re now basically at the peak, so the build-up is over, and the drawdown is about to begin, which will take about 15 years.

In 2005, President Bush made Social Security reform his highest domestic priority after he was re-elected. He spent 2005 traveling the country talking about Social Security and how it needed some reform. The reform that he advocated was establishing individual accounts that would be invested in the private sector equities.

It didn’t really gain any traction. Probably the worst moment for the proposal was in September 2005 when President Bush was asked by a reporter if diverting payroll tax money from the Social Security Trust Funds into individual accounts would make matters worse for Social Security. He admitted that that would make matters worse and that the bankruptcy year would actually occur sooner. At that point, a lot of the political support for the proposal disappeared.  Then we had the Great Recession of 2007-2009, and individual account plans lost all momentum. There aren’t many people anymore who want to divert payroll tax money into the equity markets because of the risk involved. People are more comfortable just getting a guaranteed check from the government. So that’s kind of where we are now. Nothing really has happened since 2005.

There has been Social Security legislation, notably the Bipartisan Budget Act of 2015, which made a bunch of technical changes in Social Security involving the ability to claim spousal benefits.  These things were very technical, and nobody would refer to them as reform legislation. They were much more minor than that.

Now over the years, many members of Congress have proposed ways to solve the problems. We have 535 members of Congress, and a lot of those members have introduced Bills over the years.  All of them lacked broad support and went nowhere.

Recent Social Security Reform Efforts

All of that seems to have changed in the year 2019 because the Democrats retook control of the House of Representatives. They seemed to have a more activist position on reforming Social Security than the Republicans have had, at least since 2005.

On January 30, 2019, Representative John Larson, who is the new chair of the Social Security Subcommittee of House Ways and Means Committee, reintroduced his Social Security 2100 Bill, and it was designated HR 861. I say reintroduced because he has been working on this proposal since at least 2014, but nobody cared about it until 2019 when he became the chair of the Social Security subcommittee and could move the Bill forward. It’s not all that different from the 2014 version or the 2015 version or the 2017 version, but now it may go somewhere.

This Bill has 211 co-sponsors at last count. If it receives 218 votes, then it passes the House of Representatives. If the House leadership wanted this Bill to pass, they could make it pass any time.

The Bill is designed to carry the program through to the year 2100 without any reductions in current or future benefits. That’s a very bold and striking goal. According to the Social Security Administration’s actuaries, this Bill does it.

I think we need to be a little bit humble as actuaries. It’s sort of hard to say what will work for 81 years, but at least the current projections based on the current actuarial assumptions show that result. We could have changes in actuarial assumptions. We can have changes in actual experience. We could have recessions or depressions or wars, or all kinds of things could happen. That would affect the projections. But right now, it looks a little like this Bill could succeed.

Now the Bill has a bunch of technical provisions that aren’t very important, such as it combines the two Social Security Trust Funds that exist now into a single Trust Fund. So instead of the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund, there would be one Social Security Trust Fund. Most people don’t care which Trust Fund is paying their benefit, but seven provisions are substantive and consequential.

Provision One: An across-the-board benefit increase

This provision has been described in the news media as a 2% benefit increase, but that’s not very accurate. That’s just news media shorthand. What the Bill does is it raises the first percentage in Social Security’s weighted-benefit formula from 90% to 93%. It would increase the benefits for everybody, but not by 2% of their Social Security benefit.

The Primary Insurance Amount (PIA) is the basic building block of all Social Security benefits. It is used to calculate the worker’s own benefit and any spousal benefits or children’s benefits that are payable on that worker’s earnings record.

Social Security has a weighted benefit formula where the first $926 of average lifetime earnings, after indexing and a bunch of other complicated stuff, gets a 90% weighting toward the benefit received. If you have lifetime average earnings of only about $10,000 a year, Social Security will pay you 90% of what you used to earn. That makes sense because you probably were not able to save very much if you had lifetime earnings of $10,000 a year.

As your earnings rise, Social Security replaces less. For the next $45,000 of lifetime average earnings, Social Security replaces 32%, and for earnings above about $60,000 a year, they replace only fifteen percent. This is a weighted benefit formula. The Social Security 2100 Bill would take the 90% replacement that’s currently hard-coded into the law for that first band of your average earnings and raise it to 93%.

If you exceed earnings of $926 a month, the contribution of the first band will go from $833 a month to $866 for a $28 a month increase in the PIA. That’s about 2% of the average monthly benefit under Social Security, which is $1,400 a month now.

Provision Two: Revised COLA calculation

Social Security’s cost of living adjustments (COLA) are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers or the CPI-W. The CPI that they talk about generally on the news media is the CPI-U, which is the CPI for all Urban Consumers. You might think that the CPI-U is more appropriate for calculating Social Security’s cost of living adjustment, and you’re probably right. At the time this was enacted into law back in 1973, there only was one CPI. That subsequently became the CPI-W, and that’s how we got to where we are. The cost of living adjustment for Social Security beneficiaries/retirees is based on the CPI-W. This has bothered people for a long time to some degree.

There are a lot of CPI’s out there. There’s also a CPI-E for elderly consumers. The CPE-E is relatively new, and it’s not used for any purposes under the law today, but the Social Security 2100 Bill would substitute the CPI-E as the appropriate CPI to use for calculating Social Security cost-of-living adjustments.

Substituting the CPI as the Social Security 2100 Bill would do is expected to increase COLAs by about two-tenths of one percent a year. It’s not a dramatic change, but it’s a little bit of an increase.

Provision Three: A special-minimum benefit increase

Here’s a fairly obscure one: Social Security used to have a minimum benefit for everybody of a $122 a month. That was repealed in 1981. There is no longer a minimum. Some people receive very tiny benefits such as $10 or $20 a month if they had very little connection to the paid labor force. These tiny benefits are very rare.

There’s also a special minimum benefit that is also very old but was not repealed in 1981. This minimum benefit provides a benefit larger than the regular formula for people who have low earnings for a very long time and the special minimum benefit. This benefit applies to only about fifty thousand beneficiaries out of Social Security’s 62 million beneficiaries. If you have 30 years of coverage you would be guaranteed a 125% of the federal poverty level. This is pretty expensive, but it doesn’t apply to that many people.

Provision Four: Increase the thresholds for benefit taxation

Social Security benefits used to be tax-free until 1984. Starting in 1984, up to half of the benefit became subject to tax. If you had an income of a $25,000 for single filers and $32,000 for married couples filing jointly in 1984, that was a fairly high income for a retiree, but it’s not so high anymore. Those numbers have been frozen since they were enacted into law in 1983 and first effective in 1984. Originally only about ten percent of beneficiaries had to pay tax on their benefits. It’s now up to about 40% because many retirees earn more than those thresholds.

Now, here’s something most people don’t know. The revenue from the taxation of benefits is actually transferred by the Treasury into the Social Security and Medicare Trust Funds so that tax helps support the programs. The Social Security 2100 Bill would raise the thresholds to $50,000 for single filers and a $100,000 in income for married couples filing jointly.

The thresholds would again stay frozen like they are today but at a much higher level.  This will reduce the number of beneficiaries subject to benefit taxation and the amount of income tax revenue transferred to the Trust Fund. This would have an indirect effect of raising benefits for people by not taxing them as much on their benefits.  It would also lower the amount of tax revenue that Social Security would receive.

Provision Five: Impose payroll tax on high earnings  

This is a new payroll tax that would be imposed on high earnings. Social Security has a maximum taxable amount every year. In 2019 the earnings limit is $132,900, and in 2020, it is $137,700. Earnings above that amount are not subject to Social Security tax; they are subject to the Medicare tax because the Medicare tax has no maximum.

So, if you make one hundred million dollars, you pay Medicare tax on that whole amount, but you don’t pay Social Security taxes above $132,900 in 2019. The 2100 Bill would introduce a so-called doughnut hole Social Security taxation. It would end at the current law maximum of $137,700 for 2020, but it would start again at $400,000 in earnings and continue to infinity, just like the Medicare tax. About four-tenths of 1% of workers earn over $400,000 a year. The 400,000 would be frozen, so a larger percentage of workers would be affected every year.

Provision Six: Benefits on newly taxed earnings

If all of these earnings that are taxed, will those earners gain additional benefits? Yes – Social Security has always provided earnings-related benefits. That’s a principle that is really important to many people. Some proposals over the years would have taxed additional earnings without providing any additional benefits, and many people were offended by that. Having benefits based on your lifetime taxable earnings is a valuable principle worth retaining, and it provides much public support for the program, so they didn’t want to drop that.

However, this was done for the Medicare program.  Medicare is an on/off switch; either you have it, or you don’t have it. No one gets more Medicare than anyone else. Social Security, on the other hand, doesn’t have a flat benefit. It’s not an on/off switch. It has benefits that are based on your earnings.

So people who have low earnings get a smaller benefit than people who have higher earnings, and If you’re going to start taxing earnings above $400,000, then you might want to provide some additional benefit based on those earnings, and the Bill does. Social Security’s weighted benefit formula has three bands where the lowest band receives 90 percent credit. The second band, which is the biggest one, gets 32% credit, and the highest band gets only 15%. The new super-high band for earnings over $400,000 would get just a 2% credit. It’s not a good deal for the highest-earning people, which is not a surprise. It raises lots of taxes, and it pays out only a little in benefits. It’s also time-shifted because you get the taxes right away, and the additional benefits aren’t paid for a long time.

Provision Seven: Higher payroll-tax rate

Also, the Social Security payroll tax has been 6.2% on employees and employers each since 1990. The Social Security payroll tax had gone up periodically since the program began in 1937. It started at 1% and then it went to 1.5%. It went up about 20 or 23 times over the years until it hit 6.2% in 1990. Then it just sat there. It didn’t move, and it’s been there now for 30 years. The Social Security 2100 Bill would raise the payroll tax by .05 percentage points per year starting in 2020 and ending in 2043 when it would top out at 7.40%. It is the second most financially significant provision of this Bill. It is really important and would affect everyone.

Where is the Social Security 2100 Bill Going?

Unlike prior proposals, this Bill has a powerful subcommittee chair as it’s sponsor and has more than 200 co-sponsors.

It could certainly pass the House of Representatives whenever the leadership chooses to bring it to a vote. The Bill has no Republican co-sponsors at this time. No one knows what the president would do with the legislation. He hasn’t said anything about it. He did say when he was campaigning in 2016 that he’s the only Republican who would not cut Social Security. Who knows whether that’s still his position, but this Bill would be consistent with that campaign promise because it doesn’t cut anyone’s benefits. It raises benefits. It also raises taxes, which the Republicans are generally less comfortable with, which is why it has no Republican co-sponsors.

What amendments might we see to this Bill? Well, the 1983 law, which I worked on, contained a nearly equal balance between tax increases and reductions in future benefits that were not in payment status yet. Nobody wants to cut the benefits of people who are receiving them currently, and instead cut benefits for people who aren’t yet receiving them.

We might see further increases in the full retirement age, which went up under the 1983 legislation from age 65 gradually to age 67 over about 20 years. It still isn’t even age 67 quite yet; it’ll be age 67 for people born in 1960 and later and people born in 1960 are only 59 this year, so they’re not eligible to receive benefits yet as retired workers, but that will be possible in the year 2022 when they turn 62.

The number 67 is not a magic number. It didn’t come down from the mountain top on stone tablets. Congress raised the number from 65 to 67, and they could increase it further if they wanted to age 68 or 69. People start to get a little uncomfortable when you see a retirement age of 70, but there are many people who retire at age 70. It’s not an unknown number.

As a retirement age, people are working longer and longer, and they’re also living longer and longer, so it’s not unreasonable to raise the retirement age further in Congress. They did it in 1983, and they survived. It isn’t like they all got voted out of office.


We may be seeing the emerging outlines of future Social Security reform for the first time in a long time in the Social Security 2100 Bill. It is not going to sail through the legislative process, but a lot of it is likely to survive the House.

The Senate might pass something very different. When the house and the Senate go to conference to work out the differences between their Bills, who knows which side will come out on top.

This Bill has much support, and it does accomplish the mission of restoring the Social Security program to close Actuarial balance. Something has to be done between now and 2035, and this might be it, so this Bill is worth watching closely and what we might see enacted into law.

Heading Toward Social Security Reform – Bruce Schobel

Heading Toward Social Security Reform – Bruce Schobel

About Bruce D. Schobel, FSA, MAAA, CLU, CEBS, Consulting Actuary

Bruce D. Schobel retired in 2012 as vice president and actuary of New York Life Insurance Company, which he joined in 1990. Before that, he was a principal of William M. Mercer, Inc., an actuarial consulting firm. During 1979-88, he was with the U.S. Social Security Administration in various actuarial and policy-development positions, including senior policy advisor to the Commissioner and staff actuary to the National Commission on Social Security Reform (the “Greenspan Commission”).

A frequent speaker and writer on tax and Social Security issues, Mr. Schobel’s papers and articles have appeared in The Wall Street JournalPolicy ReviewThe Journal of International Taxation and numerous actuarial publications.

A graduate of Massachusetts Institute of Technology, Mr. Schobel is a Fellow of the Society of Actuaries, a Member of the American Academy of Actuaries, a Chartered Life Underwriter, a Certified Employee Benefit Specialist and a Founding Member of the National Academy of Social Insurance. He was president of the Society of Actuaries during 2007-08 and has also served on the Boards of Directors of the American Academy of Actuaries and the Conference of Consulting Actuaries. For more than a decade, he chaired the Social Security Committee of the American Council of Life Insurers.

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©2019, Bruce D. Schobel, FSA, MAAA, CLU, CEBS, Consulting Actuary. All rights reserved. Used with permission.

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