Mandatory Spending
Function 650 - Social Security
Link Initial Social Security Benefits to Average Prices Instead of Average Earnings
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
| Billions of dollars | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2015-2019 | 2015-2024 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change in Outlays | |||||||||||||
| Implement pure price indexing | 0 | * | -0.2 | -0.9 | -2.6 | -5.4 | -9.6 | -15.1 | -22.1 | -30.6 | -3.7 | -86.6 | |
| Implement progressive price indexing | 0 | * | -0.1 | -0.6 | -1.6 | -3.3 | -5.8 | -9.2 | -13.5 | -18.7 | -2.3 | -52.9 | |
Notes: This option would take effect in January 2016. Estimates are relative to CBO’s August 2014 baseline projections.
* = between -$50 million and zero.
The Social Security Administration uses a statutory formula to compute a worker’s initial benefits, and that benefit formula changes each year to account for economywide growth of wages through a process known as wage indexing. Average initial benefits for Social Security recipients therefore tend to grow at the same rate as do average wages.
One approach to constrain the growth of Social Security benefits would be to change the computation of initial benefits so that the real (inflation-adjusted) value of average initial benefits did not rise over time. That approach, often called “pure” price indexing, would link the growth of initial benefits to the growth of prices (as measured by changes in the consumer price index for all urban consumers) rather than to the growth of average wages, beginning with participants who became eligible for benefits in calendar year 2016.
Another approach, called “progressive” price indexing, would retain the current benefit formula for workers who had lower earnings and would reduce the growth of initial benefits for workers who had higher earnings. Under that approach, initial benefits for the 30 percent of workers with the lowest lifetime earnings would increase with average wages, as they are currently slated to do, whereas initial benefits for other workers would increase more slowly, at a rate that depended on their position in the distribution of earnings. For example, for workers whose earnings put them at the 31st percentile of the distribution, benefits would rise only slightly more slowly than average wages, whereas for the highest earners, benefits would rise with prices—as they would under pure price indexing.