Social Security Administration

Proposed Spending Cuts

Chris Edwards and Tad DeHaven

August 2013

The Social Security Administration (SSA) operates three large programs that provide benefits to millions of Americans: Old-Age and Survivors Insurance (OASI), Disability Insurance (DI), and Supplemental Security Income (SSI). Total SSA spending will be $873 billion in 2013, which works out to an average of about $7,300 for every household in the nation.1

OASI will cost $668 billion in 2013 and pay benefits to 47 million retired persons.2 DI will cost $144 billion and pay benefits to 11 million disabled persons. SSI will cost $57 billion and pay benefits to 8 million disabled and low-income elderly persons.

The first two programs (OASI and DI) are together called "Social Security." Social Security is mainly financed by a dedicated 12.4 percent tax on wages. By contrast, the SSI program is financed by general federal revenues.

Spending on OASI, DI, and SSI is growing rapidly and contributing to the huge financial problems facing the federal government. As such, policymakers should pursue spending cuts to all three programs. In addition to cuts, policymakers should examine options to restructure the programs, such as converting OASI into a retirement system based on personal accounts.

Social Security Retirement

Social Security faces major financial problems. The current "pay-as-you-go" structure of the program will be unsustainable as the number of elderly people receiving benefits soars in coming decades. The program has accumulated huge unfunded obligations of $23 trillion.3 Unless Social Security restructured, it will be only able to pay a fraction of promised benefits to future retirees.

Aside from Social Security's financial imbalances, the program also causes ongoing damage to the U.S. economy. For one thing, the 12.4 percent payroll tax that funds OASI and DI creates substantial labor market distortions. Social Security also induces people to retire prematurely, which reduces the supply of experienced workers in the economy. Perhaps the most important harm caused by Social Security is that it suppresses personal savings, which has negative effects on investment and economic growth.

To rebalance Social Security's finances and reduce the program's damaging economic effects, policymakers should cut the growth in benefits. The Congressional Budget Office has described the following reform options, which would each generate growing savings over time:4

  • Change the COLA. Social Security provides a cost of living allowance to recipients each year based on a measure of inflation. Switching to a more accurate measure of inflation would reduce Social Security spending from 5.9 percent of gross domestic product (GDP) to 5.7 percent by 2050.
  • Raise the Normal Retirement Age. The normal retirement age (NRA) for Social Security is 66 and will be rising to 67 in coming years. But the retirement age should be raised further given the increasing life spans of Americans. Raising the NRA to 70 over time would reduce spending from 5.9 percent of GDP to 5.2 percent by 2050.
  • Price Indexing of Initial Benefits. A retiree's initial level of benefits is based on their earnings history, and adjusted for the growth in nominal U.S. wages over time. An alternative calculation would be to adjust past earnings by inflation. Such a reform would reduce spending from 5.9 percent of GDP to 4.2 percent by 2050.
  • Partial Price Indexing. An alternative to full price indexing would be partial or "progressive" price indexing, which would reduce the growth in benefits for middle- and upper-income workers only. Partial price indexing that left the bottom 30 percent of workers unaffected would reduce spending from 5.9 percent of GDP to 4.8 percent by 2050.

Any of these benefit changes would help move Social Security toward financial solvency and reduce pressures to raise taxes. However, retirement security would still be left in the hands of politicians, and individuals would not have the security of ownership of their retirement assets. Benefit cuts would also not solve the labor market distortions caused by Social Security or fix the program's anti-savings effects.

As such, policymakers should cut traditional benefits while transitioning Social Security to a structure based on personal savings accounts. Personal accounts would give workers the chance to earn higher returns on their contributions, encourage greater work effort, and boost economic growth.

More than two dozen countries have moved to retirement systems based on personal accounts since Chile pioneered such reforms three decades ago. In Chile, tax-advantaged personal accounts are funded by contributions of 10 percent of worker wages up to a cap. Upon retiring, workers may convert their accounts into an annuity, take planned withdrawals, or do a combination of these distribution options. The government provides a safety net for workers who have not accumulated sufficient assets for a minimum pension amount.

The Cato Institute has developed a detailed reform plan to partially privatize Social Security in the United States.5 The plan would transition to a system based on personal accounts funded by contributions of 6.2 percent of wages. It would allow various investment alternatives and provide a safety net for workers whose accounts did not provide a minimum level of retirement benefits. Social Security's trustees have examined the Cato plan and determined that it would return the program to full solvency.6

The current structure of Social Security is both unsustainable and economically damaging. Other countries have shown that privatized retirement systems based on personal accounts can benefit workers, retirees, and the overall economy. With a privatized system, young people would be able to build a secure retirement nest egg free of the political risk of future benefit cuts. So it is time for America to phase-out its old-fashioned Social Security system and move to a system where individuals take charge of their own financial futures.

Social Security Disability

Social Security Disability Insurance (DI) is a very large and troubled program. The costs of DI have doubled over the last decade, reaching an estimated $144 billion in 2013. Costs have risen so rapidly that the program's trust fund is projected to be depleted just three years from now.

DI was designed to replace a portion of workers' income in the event that they were unable to do any type of full-time work due to severe disability. However, the number of people enrolled in DI has expanded rapidly even though the share of working-age Americans who are in fair or poor health has declined over time, and even though the share that report having a work-limiting health condition has remained steady.7 At the same time, medical advances have aided people with disabilities in the workplace, and yet the number of people not working and receiving DI benefits has soared. The ratio of DI recipients to all working-age people doubled over the last two decades.8

The problem is that policymakers have repeatedly liberalized eligibility standards for DI, with the result that many people who are capable of working are making the choice to remain idle and receive benefits instead. Once people get on DI, they rarely leave the program and go back to work even if their health improves. That is bad for taxpayers and for the economy because skilled and productive people are being lured into long-term government dependency.

The liberal eligibility rules for DI, the expansion of benefits, and the system's permissive court rulings have made the program rife with waste and abuse. Many individuals who could be gainfully employed are receiving government hand-outs and not working because the system is tilted in favor of providing benefits to new applicants. The system has a multi-level appeals process that makes it possible for people with dubious claims to succeed in winning benefits if they are persistent.

With today's huge federal deficits, taxpayers cannot afford the skyrocketing costs of this huge federal program. In the long-run, policymakers should consider phasing out DI and leaving the provision of long-term disability insurance to private markets. But in the near-term, policymakers should pursue cuts to reduce the program's price tag.

Policymakers should institute stricter eligibility standards to discourage claims from people who could be working. And they should vigorously apply continuous disability reviews (CDRs) of people already receiving benefits. They should also impose a longer delay for the initial receipt of benefits to discourage frivolous applications. The CBO estimates, for example, that extending the initial waiting period for benefits from 5 months to 9 months would reduce program spending by 7 percent in the long run.9

The administrative law process for DI should be tightened. The large number of chances for people who are initially denied benefits to appeal should be reduced. Steps should also be taken to ensure greater quality control over the decisions made by SSA officials and judges. And the legal process should include a "taxpayer advocate" to challenge dubious claims made by applicants and their lawyers.

In the near-term, one reform goal would be to cut DI spending by reducing the number of program recipients to previous levels. The ratio of DI recipients to workers in the U.S. workforce averaged 4 percent between 1970 and 2008, but that ratio has now soared to more than 7 percent.10 Tightening eligibility to historically normal levels could thus reduce spending by roughly 40 percent. In the long-term, policymakers should consider ways of moving the provision of long-term disability coverage to the private sector. 

Supplemental Security Income

Supplemental Security Income (SSI) was created with the elderly poor in mind, but today the program mainly benefits nonelderly disabled adults and children. While the number of elderly beneficiaries has slightly decreased since the program began operating in 1974, the number of nonelderly disabled adults and children has increased substantially. Overall, the total number of SSI beneficiaries has grown from 4.8 million in 1990, to 6.6 million in 2000, to 8.3 million today.11

As the number of beneficiaries has increased, so has spending on the program. SSI spending has risen from $33 billion in 2000 to an estimated $57 billion in 2013, which is a 70 percent increase. In real, or after-inflation, dollars, the increase since 2000 has been 29 percent.

The growing number of SSI recipients stems from liberalizations of program eligibility over the years. In particular, the complex, subjective, and outdated disability determination process for SSI has created a breeding ground for awarding and continuing benefits to people who should not be on the disability rolls.

Policymakers should institute stricter eligibility standards to discourage claims from people who are capable of working. Policymakers also need to address the growing number of children who are qualifying for SSI on the basis of a marginal mental or behavioral disability. Many children who are capable of becoming productive working adults are being lured into long-term government dependency.

Another problem that policymakers should address is the Social Security Administration's struggle to make sure that current SSI recipients are still qualified for the program on the basis of both financial and health status. According to the Government Accountability Office, the volume of overpayments made to SSI recipients who are no longer qualified for benefits rose from $3.8 billion in 2002 to $7.3 billion in 2011.12 Unqualified SSI recipients are staying on the rolls because an insufficient number of reviews are being conducted to make sure a disability still exists. Less than 1 percent of disabled adults and most children on SSI receive a CDR each year.

Tightening eligibility standards and ensuring that SSI recipients are legally entitled to benefits would reduce taxpayer costs. However, bolder reforms are needed. One idea is to convert the program to a block grant for the states. Similar to the 1996 welfare reform, a block grant would give the states a greater incentive to reduce program costs and encourage work. 

An even more thorough reform would be to move full responsibility for funding and administering SSI to state governments. The federal government seems incapable of running welfare programs in a frugal manner and with due regard to taxpayer interests. Ideally, responsibility for caring for the needs of the disabled should rest with families, charities, churches, and other voluntary organizations, but in the meantime devolution to the states would be a large step forward.

1 Budget of the U.S. Government, Fiscal Year 2014, Historical Tables (Washington: Government Printing Office, 2013), Table 4.1.

2 Congressional Budget Office, "The Budget and Economic Outlook: Fiscal Years 2013 to 2023," February 2013. See the supplementary tables to the report.

3 The Board of Trustees, Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, The 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (Washington: Government Printing Office, 2013), p. 17. This is an "infinite horizon" estimate.

4 Congressional Budget Office, "Reducing the Deficit: Spending and Revenue Options," March 2011.

5 Full details of the plan are in Michael Tanner, "The 6.2 Percent Solution: A Plan for Reforming Social Security," Cato Institute Social Security Paper no. 32, February 17, 2004.

6 See Michael Tanner, "A Better Deal at Half the Cost: SSA Scoring of the Cato Social Security Reform Plan," Cato Institute Briefing Paper no. 92, April 26, 2005.

7 Andrew Biggs, "Social Security Disability Insurance: An Entitlement in Need of Reform," Our Generation, August 2012. And see Richard V. Burkhauser and Mary C. Daly, The Declining Work and Welfare of People with Disabilities (Washington: AEI Press, 2011), p. 38.

8 The Board of Trustees, Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, The 2012 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (Washington: Government Printing Office, 2012), Table V.C5, p. 131.

9 Congressional Budget Office, "Policy Options for the Social Security Disability Program," July 2012, Table 1.

10 Tad DeHaven, "The Rising Cost of Social Security Disability Insurance," Cato Institute Policy Analysis no. 733, August 2013, Figure 3.

11 Social Security Administration, "SSI Annual Statistical Report, 2011," SSA Publication No. 13-11827, September 2012, Table 4. And see Social Security Administration, "SSI Monthly Statistics," March 2013, Table 2,

12 Government Accountability Office, "Supplemental Security Income: SSA Has Taken Steps to Prevent and Detect Overpayments, but Additional Actions Could Be Taken to Improve Oversight," GAO-13-109, December 2012, p. 3.