As Congress considers Social Security reform many proposals will be debated.  Among the plans that may be considered: partial or full privatization of the program, including the establishment of individually managed accounts; changing the way benefits are calculated; increasing the full retirement age; changing the way cost-of-living adjustments (COLAs) are calculated; or eliminating the cap on income that is subject to taxation for the purposes of Social Security.  This section for informational purposes focuses on these plans and the resulting changes that would occur if they were made, but do not reflect the positions of Senator Leahy.

Privatization of Social Security

The President has announced a plan for Social Security reform that would include the creation of personal accounts within the Social Security program.  His plan calls for individuals to be able to set aside some part of their payroll taxes into a private account that they could then invest in the stock market.   Administration economic officials have said that the government will need to increase the deficit by as much as $2 trillion in order to cover the cost of creating new personal accounts.  The President has indicated that he intends that reform will include some reduction in benefits, such as a change in how benefits are calculated as described in the following section. 

Wage Indexation versus Price Indexation

The reform plan proposed by the Administration may include changing the way a retiree's initial benefit level is calculated.  Currently a worker's future Social Security benefits are adjusted each year based on a formula that takes into account the growth rate of average wages in the U.S. economy from the previous year.  As a result, the percentage of wages replaced by Social Security is the same no matter when you were born.  Under current law an individual born in 1970 and who retirees at 65, would have about 40% of their wages replaced by Social Security.  The same would be true for an individual born in the year 2000.  Under current law, if they retired at age 65 they too would have 40% of their wages replaced by Social Security.

Using inflation rates, rather than the rise in wages over a worker's lifetime, would reduce the initial benefit level for a retiree because prices increase slower than wages.  If price increases were used to calculate benefits, Social Security would no longer replace the same percentage of a retiree's wages.  An individual born in 2000 who works until they are 65 would have only 20% of their wages replaced by Social Security under this proposal.  

Increasing the Retirement Age

When Congress enacted legislation in 1983 to solve Social Security's financing problems, it included a provision that gradually will raise the full retirement age (the age at which one receives unreduced benefits) from age 65 to age 67.  One reform plan that has been proposed calls for increasing the retirement age to either 69 or 70.  Proponents of this plan claim that the life expectancy has increased since Social Security was created in 1935.  Opponents counter that this change would result in a reduction of benefits for retirees and that it penalizes individuals who had based their retirement plans on current law.  To read a report prepared by the Congressional Research Service on the retirement age, click here.

Modifying the COLA

Currently the COLA is based on the percentage change in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third calendar quarter of the previous year to the third calendar quarter of the current year.  There is some concern, however, that the CPI-W does not accurately reflect the inflation experience of the elderly population because the prices of items commonly needed by seniors, including health care, are rising faster than overall prices. In an effort to protect the purchasing power of Social Security benefits, an experimental seniors-only consumer price index is being studied by the Bureau of Labor Statistics.

Eliminating the Earnings Limit

In 2004, Social Security taxes were levied on earnings up to $80,400 and that amount will increase to $90,000 for 2005. This base has been a part of the Social Security program in one form or another since its inception in 1935. There have been proposals in Congress to raise the base, ensuring that more earnings are taxable, as well as to eliminate the base altogether, ensuring that all earnings are taxable.  To read a report prepared by the Congressional Research Service on the earnings base, click here.