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.
Hi my family member! I want to say that this post is awesome, nice written and include
almost all vital infos. I would like to see more posts like this .
Cutting back on the rate of Social Security COLA will be as bad as direct cuts themselves. With each passing year, people on Social Security (who get a pathetic amount as it is) will find themselves less and less able to keep up with the rate of inflation. And before long, they will fall far behind.
It's like tying a lead anchor to the legs of millions of elderly & disabled people, asking them to keep swimming, and every year you add a couple more pounds of weight.
Are those constant dollars?
These numbers are completely skewed by looking at averages. The highest earners (and thus largest beneficiaries of social security on an annual dollar basis) also live the longest, at least 4.5 years longer, on average than low income Americans.
So that means when you adjust benefits from 67 to 70, you reduce the time for receiving full benefits to zero for many at the low income stage because they are dying earlier, and on averaging you're cutting the number of years they receive benefits by almost 50%.
At the high income side, you are reducing the number of years they receive benefits by less than 25% because they live so much longer.
Reminder, the high earners receive the highest benefits for the longest time and thus have a much greater impact on the “average” benefits than do the low earners. Lop off the bottom 1% completely, and the average won't move much because they weren't receiving much anyway. But if you ask them, you've just ruined the last two years of their life!
Moving the retirement age to 70 will have a huge negative impact on the poorest Americans and it will be almost meaningless to the richest.
You need to look at life expectancy by income when considering retirement age.
The CBO benefit increase assumptions seem to me to be too optimistic. Over the 30 yrs from 1978 to 2008 (the latest available) the CPI-adjusted increase in the Social Security average wage (which drives the benefit computation) was less than 0.5% per year (a cumulative increase of 14% over the 30 years). The CBO assumes that future increases in average wages will be at a rate several times faster.
It may be that the CBO is required to make rosy assumptions, but I don't see where this “New Jerusalem” is coming from. If real wage ncreases over the next few decades are comparable to those over the last three, the picture looks vastly different.
The conclusion has to be that benefit cuts alone are not the answer, and may not even be a part of the answer. Increasing income for families will lead to both larger families and the likelihood that all populations, especially African-Americans, will live longer – since higher income families tend to have better educational opportunities – partly because young people are not forced into subsistance jobs at an early age (or illegal jobs which lead to incarceration).
A $500 per child monthly tax credit would certainly lead to more children and thus change the demographics on Social Security, Medicaid and Medicare. Change the demographics and increase taxation from wealthier individuals and capture unearned income from everyone – not just the highest earners and all programs go into balance.
Well, except only the rich and middle class are living significantly longer. By raising the retirement age we will be excluding from ever receiving benefits some of the people who need it most: those making low wages in physically demanding jobs. Not to mention that given disparities in wealth, health care and economic opportunity any such change would disadvantage African-Americans far more than Whites. Surely we can come up with a less racist and regressive change to leave this solvent.
Analyzing Social Security in isolation, balancing its tax revenues against its outlays, ignores the pressure that will come from the other unsustainable programs: Medicare and Medicaid. Those programs, plus the new health insurance subsidies, will squeeze every other area of government spending. Social Security will not be exempt from this pressure, despite its ostensibly dedicated revenue stream.