News from EPI Saving Social Security in Three Steps—Press

For immediate release: Tuesday, November 24, 1998
Contact: Brian Lustig (202) 331-5530 or Nan Gibson (202) 331-5546


Modest changes will correct shortfall in Social Security Trust Fund; Indexing payroll contributions to longevity among proposed modifications

Washington, D.C. — By adopting any of three leading plans for reforming Social Security, the typical worker would experience between 20-40% in retirement benefit cuts, according to a new report released today by the Economic Policy Institute (EPI). The report finds that most workers would be better off if modest adjustments to the current Social Security program were made, rather than adopting the leading plans for reforming the system.

In Saving Social Security in Three Steps (PDF), EPI economist Dean Baker offers a three step plan that addresses the long-term solvency of the Trust Fund, while leaving retirees’ benefits and the program itself intact. Furthermore, Baker critiques three prominent proposals to reform Social Security and finds that they would all significantly reduce benefits and/or increase taxes for retirees.

Increased life expectancy is the primary cause of the future shortfall in the Social Security Trust fund, due to the significantly longer period of time that future generations are projected to spend receiving benefits, according to Baker. Simply living longer will increase the per-person benefit payments by nearly 25% at the end of the planning horizon in 2075. The current level of Social Security tax will be largely sufficient to finance the retirement of the large baby boom cohort, but will not be able to cover the cost of ever-lengthening retirements.

Radical plans to reform Social Security are unwarranted, according to Baker, who argues that modest changes will allow all benefits to be paid over the 75 year planning horizon and at the same time leaves the fundamental structure of the program intact. Baker proposes the following changes to correct the current shortfall of 2.19 percent of payroll (the amount each step will count toward closing the gap are in parentheses):

  • Commit a portion of the federal government’s projected budget surpluses to the Social Security Trust Fund; or, alternatively, index the payroll tax to increases in life expectancy (1.4 percentage points);
  • In the spring of 1998, the Bureau of Labor Statistics (BLS) announced changes to the CPI that would reduce the measured rate of inflation by 0.2 percentage points annually. The impact of these changes should be fully incorporated into projections for the trust fund (0.28 percentage points); and
  • Return the cap on the wages that are subject to the payroll tax to 90% of wages (currently the cap is $68,000) so that it keeps pace with the upward distribution of income (0.55 percentage points).

Social Security must, by law, project its funding expenses over a 75-year period. The 1998 Social Security Trustees’ report projects a shortfall in the Fund of 2.19 percentage points of payroll. In other words, if the Social Security tax was 2.19 percentage points (1.095 each for both the employee and employer) higher, the fund would be able to pay scheduled benefits over the next 75 years.
Despite the fact that the Social Security program is sound and will have no problem paying all scheduled benefits for the next 34 years, a host of proposals to restructure the system have been put forward which threaten the well-being of current and future retirees.

Unlike Baker’s plan, three leading proposals currently being floated to ‘fix’ Social Security do not preserve the current schedule of benefits through the 75-year planning horizon. Instead, The National Commission on Retirement Policy plan; the Schieber-Weaver proposal put forth by members of the president’s Advisory Council on Social Security; and the Kerry-Moynihan plan, all involve cuts in retirees benefits by raising the retirement age, cutting annual cost-of-living adjustments (COLAs), or reducing mandated benefits.

Most would also shift a portion of the Social Security payroll tax receipts into individual savings accounts, with associated increases in administrative costs. In contrast to many private sector insurance and retirement programs, Social Security achieves its goals with extremely low administrative expenses and few instances of fraud and abuse.

Baker’s estimated benefit reductions under the three leading plans include the following:

National Commission on Retirement Policy

  • Cuts benefits for middle- and higher-income workers, for example.
  • Under current law, an average income worker ($27,026 annual wage in 1998) who retired at age 65 in the year 2045 would receive 37.7% less in benefits under the commission plan, than under the current Social Security system.
  • The money placed in mandated savings accounts under the plan only offset these cuts by 10 percentage points, leaving the average income worker’s benefits reduced 27.9% from the levels of the current Social Security system.


  • Reduced guaranteed benefits to below poverty level, leaving workers dependent on mandated savings accounts
  • Under this plan, an average wage worker retiring at age 65 in 2045 would receive 22-31% less in benefits than under the current Social Security system.
  • An average-income worker will pay more than $40,000 in administrative fees over their lifetime.


  • A lower COLA means that beneficiaries will see a decline of 1.0% in benefits compared to the current law. This change would hit older people, typically the poorest of the elderly, the hardest.
  • Under this plan, an average wage worker retiring at 65 in 2045 would receive 37.8% less in benefits than under the current Social Security system. An optional individual retirement account would only offset the cuts by 4.4 percentage points, leaving the worker’s benefits leaving the average income worker’s benefits reduced 33.4% from the levels of the current Social Security system.

“The fact that we’re living longer means that we either need to put more money away during our working years, receive lower benefits during retirement years, or work more years before retirement,” says Baker. “Given the options, we should be thinking about putting away more money.”

Dean Baker is a macroeconomist with the Economic Policy Institute. He is the author of Defusing the Baby Boomer Time Bomb: Projections of Income in the 21st Century (1998); America’s Golden Years: Ensuring Prosperity in an Aging Society (1998); Nine Misconceptions about Social Security (The Atlantic Monthly, 1998); and Saving Social Security With Stocks: The Promises Don’t Add Up (1997).

The Economic Policy Institute is a nonprofit, non-partisan economic think tank based in Washington, D.C.

To order copies of Saving Social Security in Three Steps, contact EPI at 1-800-EPI-4844.