Proposed Social Security Cut Would
Index Benefits to 2006 Living Standards Level, Eroding Retirement
Income for Everyone Thereafter
by Christian Weller
President Bush’s Commission to Strengthen Social Security
convened behind closed doors on August 22, unwilling to meet under the
watchful eyes of the public as it begins to look for ways to cut
social security benefits. One such cut being considered—a change in
the way benefits are calculated—would mean that the living standards
of future generations will begin to resemble the lower living
standards of the past.
The benefit cut in question is an obscure yet substantial change in
the way benefits are calculated. Instead of basing benefits on an
individual worker’s actual wage and the average wages prevalent at
the time of retirement, benefits would be determined by price changes
relative to an arbitrarily set year, in this case 2006. This would be
a dramatic change in the way initial benefits for retirees are
currently calculated. As a result, social security benefits, after
adjusting for inflation, will stay fixed forever thereafter, never to
increase in step with the future improvements in living standards that
occur over time.
Because wages generally grow faster than inflation, social security
benefits, compared to today’s benefits, would be continuously
reduced for anyone retiring after 2006. In other words, each new group
of retirees would receive lower benefits relative to their earnings. A
recent study by the Congressional Research Service calculates that
this would cut benefits by 13% for those retiring in 2020, and by 41%
for those retiring in 2070. Under current law, a worker with a
lifetime of average earnings retiring in 2020 can expect a monthly
benefit of $1,390 (in 2001 dollars). If this new indexation scheme is
enacted, the same worker’s monthly benefit would be reduced by $180.
For a worker retiring in 2070, the cut would amount to a benefit of
$924 (in 2001 dollars).
Productivity and wage growth allow the living standards of the
average worker to rise over a typical 30 to 40 year work life.
Indexing benefits to workers’ wages, as is the case now, means that
they will receive retirement benefits that reflect the living
standards they experienced during their careers. If benefits instead
become indexed to prices (i.e., inflation) retirees would be forced to
revert to some past living standard level. Thus, a worker who is 40
years old today and who retires at 66 in 2027 would have his or her
social security benefits calculated on the wages that prevailed in
2006, not in 2028. If this had been a feature of social security since
its inception, today’s retirees would receive a benefit that was
linked to a basic living standard set in 1935, when a large share of
households did not even have indoor plumbing.
There is no economic or social rationale for forcing retirees to
accept living standard levels that are several decades old. Seniors
should benefit from the economy they helped to build. For three or
four decades prior to their retirement, workers are productive members
of society, helping to raise the living standards for everybody and to
lay the foundation for further improvements by future generations.
A large and increasing cut to retirement benefits would leave
future generations with inadequate retirement incomes. This would make
a bad situation even worse—current research on retirement income
already shows that a large share of today’s workforce is
inadequately prepared for retirement. Although these estimates on the
adequacy of retirement savings vary, most recent studies show that
about half of all workers won’t have enough income to sustain
themselves in their retirement.
Social security is the largest and most important component of
retirement savings for Americans, providing about 58% of total income
for the average retiree over 65. Most workers cannot increase their
savings enough to compensate for the proposed loss of social security
benefits. Increasing retirement savings would be particularly
unrealistic for low- and moderate-income families, who already
struggle simply to meet current basic needs. And even if they could
somehow set aside some money for retirement, there is no way for such
families to know how much to save or where to invest it in order to
make up for the proposed reduction in social security benefits.
Leaving future generations worse off than current retirees runs
counter to America’s long-held commitment to ensuring that each
generation—young or old—is better off than the one before it. |