Analysis of the Jeb Bush Proposal to Reform Social Security

Andrew G. Biggs
Resident Scholar
American Enterprise Institute
Former Florida Gov. Jeb Bush, a candidate for the Republican presidential nomination, has
released a proposal to reform the Social Security program and improve the systems finances.
The following outlines the details of the plan, based upon discussions with Bush campaign staff,
and uses a microsimulation model of the Social Security program to project how the plan might
affect the systems financial health and benefit payments were it to be implemented.

Background on the Social Security program

Social Security, or technically the Old Age, Survivors and Disability Insurance (OASDI) program,
pays benefits to retirees, the survivors of eligible workers, and workers who become unable to
work through disability. Benefits are calculated as a progressive replacement of lifetime
coverage earnings, with the inclusion of spousal benefits and adjustments for the age at which
the participant claims benefits. The program is financed principally through a 12.4 percent tax
on wages up to $118,500, with the tax split evenly between employers and employees. In
addition to payroll taxes, Social Security receives revenue from income taxes levied on Social
Security benefits. Social Security also has a trust fund, whose value as of the beginning of 2015
was $2.8 trillion. The special-issue Treasury bonds held in the trust fund can be redeemed to
enable the program to maintain the payment of full benefits even when the programs benefit
obligations exceed its tax revenues. As with any government bond, repayment of trust funds
bonds poses a financial obligation on the non-Social Security portion of the federal
governments budget.
According to the Social Security Trustees and the Social Security Administrations actuaries,
Social Securitys trust fund is projected to remain solvent through 2034 and the program as a
whole will run an actuarial deficit of 2.68 percent of taxable payroll over the next 75 years. The
Congressional Budget Office performs similar projections, estimating that Social Security would
remain solvent through 2028 and run an actuarial deficit of 4.4 percent of payroll over 75 years.
Once Social Securitys trust funds are exhausted, the program would reduce benefits to the
level payable through the programs dedicated tax revenues. This would involve a roughly one1|Page

fifth reduction in benefits in the year of insolvency, with larger reductions over time as the
programs dedicated tax revenues fell increasingly short of scheduled benefit payments.

Modeling background
Gov. Bushs proposal is analyzed using a suite of models developed and maintained by the
Policy Simulation Group.1 The PSG models simulate a sample of the U.S. population on an
individual and household basis and project that population into the future. Using this
population, the models simulate participation in the Social Security program and employersponsored pensions. Only the Social Security provisions of Gov. Bushs proposals are analyzed
here. Details of the provisions of the plan are based upon discussions with Bush campaign staff.
The PSG models have been used by the Social Security Administration, the Government
Accountability Office and the Department of Labor and produce outcomes very similar to those
generated by the Social Security Trustees and the Social Security Administrations Office of the
Chief Actuary.

Summary of Social Security Provisions

Gov. Bushs proposal includes a number of provisions designed to balance Social Securitys
finances, improve incentives to delay retirement, and provide a stronger safety net for longterm low-earning workers. These provisions include:
Increase the normal and early retirement ages. Social Securitys Normal Retirement Age
(currently 66) will under current law increase to 67 for individuals turning age 62 in 2022. Under
the reforms proposed by Gov. Bush, the normal retirement age would continue to increase at a
rate of one month per year, such that over the following 36 years the normal retirement age
would rise to 70. In addition, Social Securitys Early Entitlement Age (commonly referred to as
the early retirement age) would increase by one month per year beginning in 2022 and reach
65 for individuals turning 62 in 2058.
Increase benefit adjustment for individuals who delay retirement. Social Security awards
increased benefits to individuals who delay claiming benefit after the early retirement age of
62. These adjustments are accomplished via the Actuarial Reduction Factor, which applies to
benefits claimed prior to the Normal Retirement Age, and the Delayed Retirement Credit, which
applies to benefits claimed after the Normal Retirement Age. Under current law, the Actuarial
Reduction is equal to 6.7 percent per year that benefits are claimed prior to the Normal
Retirement Age. The Delayed Retirement Credit increases benefits by 8 percent for each year
that claiming is delayed past the Normal Retirement Age. This policy increases both the
Actuarial Reduction Factor and the Delayed Retirement Credit to 9 percent, beginning in 2022.
These changes are designed to encourage individuals to delay claiming Social Security benefits

Details of the models are available at www.polsim.com.

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and extend their work lives. However, the modeling assumes that individuals claim benefits as
they would under current law.
Eliminate the Retirement Income Test. The Retirement Earnings Test reduces benefits for some
individuals who continue to work while claiming benefits prior to the Normal Retirement Age.
In 2015, benefits are reduced on a 1-for-2 basis for each dollar of earnings in excess of $15,720;
in the year an individual reaches the Normal Retirement Age, the earnings threshold is
increased to $41,880. At the Normal Retirement Age, benefits are adjusted to account for any
reductions that took place prior to the Normal Retirement Age. Under Gov. Bushs proposal, the
retirement income test would be eliminated beginning in 2018.
Eliminate the employee portion of the Social Security payroll tax for workers over the age of 67.
Beginning in 2018, Gov. Bushs proposal would eliminate the 6.2 percent employee share of the
Social Security payroll tax for individuals aged 67 and above.
Establish a minimum benefit for long-term low-wage workers. The proposal would establish a
benefit equal to 125 percent of the federal poverty threshold for individuals with 30 years of
earnings. The benefit would be scaled for individuals with between 10 and 30 years of earnings.
This policy would begin in 2022.
Adjust Social Security benefit formula. Social Securitys current benefit formula replaces 90
percent of Average Indexed Monthly Earnings up to $826, 32 percent of earnings between $827
and $4,980, and 15 percent of earnings between $4,981 and the contribution and benefit base,
currently $9,975 per month. Between 2022 and 2040, the proposal would increase the first
replacement factor from 90 percent to 93 percent, reduce the second factor from 32 percent to
21 percent, and reduce the top factor from 15 percent to 5 percent.
Calculate COLAs using Chained CPI. Beginning in 2018, the proposal would use the Chained
Consumer Price Index for All Urban Consumers to calculated annual Cost of Living Adjustments
for Social Security benefits. It is assumed that the Chained CPI produces COLAs that are 0.3
percentage points lower on an annual basis than would be calculated using the Consumer Price
Index for Urban Wage Earners and Clerical Workers (CPI-W), which is currently used to calculate
COLAs.

Financing results
The plan is analyzed under the assumptions used in the 2015 Social Security Trustees Report. As
noted above, the 2015 Report projected that the combined Social Security Trust Funds would
remain solvent until 2034 and over 75 years the program would run an actuarial deficit equal to
2.68 percent of taxable payroll.
Analyzed using the PSG models, Gov. Bushs proposal would generate a 75-year actuarial
balance of 0.0 percent of payroll, meaning that the program would be expected to be almost
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precisely balanced over 75 years. In practice, changes in the factors that affect Social Securitys
finances could cause the program to be over- or under-funded over time.
The combined Social Security trust funds are projected to remain solvent throughout the 75year period. The ratio of trust funds balance to annual benefit outlays (the trust fund ratio) is
a common shorthand measure of funding health. This ratio is projected to be rising toward the
end of the 75 year period, indicating so-called sustainable solvency in which the program
could be expected to remain solvent following the end of the 75-year period.
Figure 1 shows projected annual Social Security income and costs under Gov. Bushs proposal.
Income is composed of payroll tax revenues and income taxes levied on Social Security benefits,
while costs are composed of benefit outlays and administrative costs. Costs currently exceed
income and would continue to do so for several decades, during which time Social Security
would continue to rely upon Treasure securities held in the combined trust funds to maintain
full benefit payments. By mid-century, benefit costs would fall below revenues and the program
is projected to run very modest payroll tax surpluses in following years.
Figure 1.

Projected Social Security Annual Income and Cost Under Gov. Bush
Proposal
18%
16%

Percent of Taxable Payroll

14%

12%
10%

Income

Cost

8%
6%
4%
2%

2012
2015
2018
2021
2024
2027
2030
2033
2036
2039
2042
2045
2048
2051
2054
2057
2060
2063
2066
2069
2072
2075
2078
2081
2084
2087
2090

0%
Year

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Conclusion
In coming months, I will use the PSG models to simulate both system financing and the level
and distribution of benefits under a number of proposed reforms to the Social Security
program.

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