Revising Social Security Benefit Formula Which Favors Short-Term Workers Could Save Billions

Short-term workers have contributed a relatively small amount of social security tax because they have had little work in covered employment. However, they receive a higher return on their contribution than the average wage earner because of the benefit formula used to attain the program's social adequacy objectives. This advantage is created by spreading the worker's covered earnings over a lifetime and applying the resulting artificially low average wage to a benefit formula that is favorable for low wage earners. Stopping the short-term worker advantage could save as much as $15 billion over the next decade and end windfall social security benefits to retired Government workers who also receive a pension from their noncovered employment.

Because a social adequacy benefit seems inappropriate for the average or high wage earner and, in view of the concern about the financial stability of the social security program, Congress should consider revising the social security benefit formula to remove the advantage that it provides the short-term worker. GAO identified two methods of removing the short-term worker advantage: (1) the continuation factor approach would allow full benefits only to people who have worked a lifetime in covered employment by adding a step to the benefit computation process which applies a factor based on the portion of a person's life spent in covered employment to the computed benefit amount; and (2) the bend point method would limit the amount of each year's earnings that may be applied against the highest rate of the benefit formula.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Joseph F. Delfico Team: General Accounting Office: Human Resources Division Phone: (202) 512-7215