CBO's Options to Improve Social Security Solvency

Social Security is the largest federal government program and provides income to nearly 70 million retirees, dependents, survivors, and disabled workers. On a combined basis, the Social Security Old-Age, Survivors, and Disability Insurance (OASDI) trust fund is projected to spend $21 trillion over the next decade, with outlays rising to 6 percent of GDP by 2035. Over the same period, dedicated payroll tax and other revenue sources are projected to be $2.6 trillion short of costs, exhausting the old-age trust fund by 2033, according to the Congressional Budget Office (CBO). Upon insolvency and absent Congressional action, Social Security recipients will face deep benefit cuts. We've previously estimated the initial cut, which would amount to a 21 percent across-the-board benefit reduction, would equal about $16,500 for a typical couple retiring that year.

CBO's recently published Options for Reducing the Deficit, including 11 policies that could meaningfully reduce the cost of or increase revenue collection for the Social Security program, improving the solvency of the Social Security trust funds.

Building upon our Budget Offsets Bank, we re-estimated these policies for the Fiscal Year (FY) 2026-2035 budget window and calculated the share of the 75-year shortfall they would close. Under current budget rules, these savings cannot be used to offset new tax cuts or spending and cannot be part of a reconciliation bill, but they can be used to improve Social Security solvency and to reduce projected deficits (which assume full benefit payments continue beyond trust fund exhaustion).

With trust fund exhaustion looming, policymakers should consider CBO’s options to avoid cuts to benefits, improve the nation's economic and fiscal outlook, and preserve the program for future generations.

The table below is a menu of options and does not represent recommendations from the Committee for a Responsible Federal Budget, its board, or its staff.

Options for Improving Social Security Trust Fund Solvency

Source: Committee for a Responsible Federal Budget estimates based on CBO projections.
*Not estimated.

Currently, Social Security benefits are calculated by taking a worker's average monthly earnings, indexed to wage growth, and applying a progressive formula that, for new beneficiaries of full retirement age in 2025, returns 90 percent of the first $1,226, 32 percent of the next $6,165 (earnings between $1,226 and $7,391), and 15 percent of any remaining earnings (limited by the taxable maximum of $176,100). This formula could be adjusted over time in a progressive manner to reduce program costs. For example, retaining the 90 percent and 32 percent factors for the bottom half of earners and gradually reducing factors in the top half from 32 and 15 to 10 and 5 – which was recommended by the Simpson-Bowles fiscal commission – would save $170 to $280 billion, depending on the phase-in pace. Applying a similar reform to only the top 30 percent of earners could save $70 billion if phased in for new beneficiaries by 2034. These changes would reduce Social Security's 75-year solvency gap by 20 to 40 percent.

Policymakers could go even further in increasing Social Security's progressivity by gradually replacing the current formula with a flat benefit – thus lowering benefits for higher earners while increasing benefits for lower earners. Immediately adopting a flat benefit at 150 percent over the poverty level would save $400 billion over a decade and close 115 percent of the solvency gap, while setting the benefits at 125 percent of poverty would save $820 billion and close 150 percent of the solvency gap. Although neither option would generate savings fast enough to avoid a temporary trust fund exhaustion, they would ultimately lead to very large Social Security surpluses, which would allow policymakers to reduce future taxes or increase the generosity or growth rate of future benefits to a higher share of poverty.

CBO also finds that calculating annual cost-of-living adjustments (COLAs) with the chained CPI – a more accurate measure of inflation than the currently used CPI-W – would save $260 billion over a decade ($350 billion if applied government-wide to all benefits programs with COLAs) and close 10 percent of Social Security's solvency gap. Raising the retirement age by 2 months per year from 67 to 70 would save $150 billion over a decade and close 35 percent of Social Security's solvency gap. Increasing the recency of work requirements from five of the last ten years to four of the last six years for the Social Security Disability Insurance (SSDI) benefits would save $70 billion over a decade.

CBO offers three options to increase revenue going into the Social Security trust fund. The current 12.4 percent payroll tax is applied to a worker's first $176,100 of wages (a threshold that grows with average wage growth) – about 82 percent of all earnings – and benefits are calculated only based on that taxable income. Increasing the taxable maximum of earnings subject to payroll taxes to cover 90 percent of earnings – $305,100 if applied in 2024 – would raise $800 billion through 2035 and close 20 percent of the program's 75-year solvency gap. Applying the payroll tax to all earnings greater than $250,000 without crediting the taxes for benefit purposes would generate $1.6 trillion in savings over ten years and close 70 percent of the 75-year solvency gap. And covering all newly hired state and local workers in states that currently offer Social Security alternatives would generate $180 billion over the next decade.

These options represent just a few of the many possible ways to restore Social Security solvency. Our Social Security Reformer tool gives users many more options and iterations, including changes to the payroll tax rate and how average wages are calculated and used to compute benefits. The Office of the Chief Actuary of Social Security has also published hundreds of options, and in the coming months and years, we will release a number of novel trust fund solutions.

With Social Security’s looming insolvency only eight years away, thoughtful solutions can help avoid deep across-the-board cuts, improve retirement security, strengthen economic growth, put the federal debt on a more sustainable path, and secure the Social Security program for generations.