Will Social Security Reform Cut Benefits?
Will Social Security reform cut benefits? That’s highly unlikely. It’s more likely that reform will simply cut the rate of growth in benefits.
Social Security reformers have often thought about reform in terms of the annual benefits they want to give people. The complication with this approach is that it ignores the enormous increase in the number of years that benefits have been paid as people retire much earlier and live longer than they did when Social Security was first created.
That’s why it helps to focus on lifetime benefits—how much will be paid over a normal lifespan—rather than just looking at the annual benefit. That way, reformers can get a better sense of how much they want total benefits to rise and, for a given cost, the tradeoff involved as more years of retirement support reduce the level of annual benefits payable.
Fortunately, CBO’s July 2010 report on Social Security Reform Options helps put a focus on lifetime benefits by showing how much they would grow with no reform and under various reforms that adjust benefits.
Consider scheduled benefits, or how much the current benefit formula projects would go to future generations. This assumes that current tax rates will generate enough income to cover those benefits, which they will not.
CBO projects that scheduled lifetime benefits will grow substantially since the current system increases benefits automatically for future cohorts as real wages grow and people live longer. In today’s dollars, CBO calculates that a single person born in 1960 (assumed to retire at age 65 in 2025) who earns close to median wages over their lifetime is scheduled to receive approximately $250,000 in lifetime Social Security benefits, while a similar earner born in 2000, expected to retire in 2065, would receive around $420,000.
On the other hand, if Social Security only pays out what the current tax rate can fund, lifetime benefits still grow, but only to $320,000. That simple calculation tells us that, regardless of the level of tax increase that Social Security reform might entail, it is extremely unlikely that real lifetime benefits will ever fall below their current levels. (There still could be a transition issue in the near-term because of rapid impact of baby boom retirement, but the basic conclusion holds.).
Now consider some of the benefit cut options in the CBO report. For instance, CBO projects that raising the full retirement age to 70 would cover approximately half of the current imbalance in the system. The person retiring in 2025 would receive approximately $242,000 in lifetime benefits, and the person retiring in 2065 would receive $357,000—well above the $320,000 benefit payable to that cohort under the current system.
The basic point is simple: Social Security reform, almost no matter how designed, is likely to provide higher levels of lifetime benefits for future cohorts of retirees compared to today’s retirees—just not as much as is scheduled under today’s unsustainable system.