As the percentage of workers who can count on a traditional defined-benefit pension is falling rapidly, we have been lowering the Social Security benefits relative to their earnings. This reduction in benefits has not been widely noted because it takes the form of an increase in the age at which workers can receive their full benefits. This had been age 65 for workers who reached age 62 before 2003.
The age for full benefits then rose gradually to age 66 for workers who reached age 62 after 2008. It remained at this age until 2017, at which point it again began to increase, reaching 67 for workers who turn 62 after 2022. This increase in the age for full benefits amounts to roughly a 12 percent reduction in the value of a worker’s Social Security.
There was a further reduction in the 1990s that received little attention because of its technical nature. Benefits are indexed after retirement to the rate of inflation as measured by the Consumer Price Index (CPI).
There were a series of changes to the CPI that lowered its measure of the rate of inflation by roughly half a percentage point annually. This means that if the old CPI would show a 2.5 percent rate of inflation this year, the new CPI would show a 2.0 percent rate of inflation. Accordingly, retirees’ benefits will go up a 0.5 percentage point less this year because of the differences in the CPI.
While this may seem trivial, it adds up over time. If a typical person can expect 20 years of retirement, by the end of this period, their benefits will be roughly 10 percent lower because of the changes in the CPI.
Given these cuts, and the lack of alternative sources of income, many current and future retirees are facing difficult financial prospects. In this context, a modest increase in benefits can make a big difference in their lives.
One simple proposal that would involve minimal administrative work would be to change the basic formula for calculating benefits. The benefit formula is somewhat complicated, but it is structured as a progressive payback formula based on workers’ average income over their working lifetime.
As it stands, workers get 90 percent of the first $10,700 of their average pay. They get 32 percent of the next $50,100, and 15 percent of their average wage above this amount up to the maximum. If the formula were changed to give workers 100 percent of the first $10,700 of their average pay it would amount to an 11 percent increase in benefits for workers whose lifetime earnings put them at or below this threshold.
This would come to a bit less than $90 a month for a worker right at the $10,700 threshold. That could make a difference for retirees in this situation. For many, it could mean being able to pay the rent, buy food, and pay the heating bill. This increase is similar to measures that have been put forward by Senators Brown, Sanders, and Warren, among others.
The total cost of this change would be a bit more $60 billion a year. That comes to around 7.0 percent of total Social Security spending. It is equal to approximately 1.4 percent of all federal spending.
If this seems like too much, the change can be structured so that only the bottom third or so of beneficiaries see this increase. In that case, the cost would be less $30 billion a year or less than 4.0 percent of Social Security spending.
There are other changes to Social Security that we should be considering, such as increasing the benefit for surviving spouses. We should also look to build on the actions of more progressive states in developing government-sponsored pension plans that avoid the high fees that the financial industry charges 401(k) and IRA accounts. But, changing the payback formula for moderate wage earners is an important first step that Congress should be debating.