Partial Lump Sum Social Security Option Would Reduce OASDI Costs in the Long Term

A proposal to allow some retirees to receive lump sum Social Security payments would result in higher costs for Old Age, Survivor and Disability Insurance (OASDI) in the short term, but a small net reduction in OASDI costs in the longer term, says Social Security Chief Actuary Stephen Goss.

The proposal is contained in the Providing Choice for Social Security Retirees Act (H.R. 3112), introduced by Rep. Sam Johnson (R-TX) on June 29.

The measure would provide a partial lump sum option for workers becoming initially entitled for retired worker benefits in 2019 or later at an age older than their normal retirement age. At the first month for which benefits will be received, these workers could choose to receive a lump sum amount equivalent to 2% (one-fourth of the value) of any 8% delayed retirement credits (DRCs) earned up to that time. A 6% DRC (the usual 8% DRC less the 2% converted to a lump sum) would apply for their subsequent monthly retired worker benefits. This provision would not affect any DRCs applicable for a surviving spouse of the worker.

Under the proposal, the lump sum amount would be calculated using projected unisex mortality for retirees by birth year and age of initial benefit entitlement. Goss assumes that the lump sum amount would be calculated on a present discounted value basis using the assumed future effective interest rates earned on holdings of the combined OASI and DI Trust Funds.

Goss told Rep. Johnson, who chairs the Ways and Means Subcommittee on Social Security, and Rep. Adrian Smith (R-NE) in a Sept. 19 letter that initially the proposal would result in additional lump sum benefit payments because the effect of reduced monthly benefits for those who chose the lump sum would not be fully realized on an annual basis for more than 20 years.

“Therefore, while enactment of the proposal would have a negligible net effect on the long-range actuarial balance (that is, less than 0.005% of taxable payroll) for the OASDI program, we estimate that it would increase OASDI cost (net of additional revenue from taxation of benefits) by a total of about $19 billion over the period including calendar years 2017 through 2026 under our assumed take-up rate,” wrote Goss. For years after 2032, Goss said, “we estimate that enactment of the proposal would generally result in a small net reduction in annual OASDI program cost,” and that the projected year of reserve depletion for OASDI funds would remain 2034 as currently projected.

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