Social Security Benefit Changes
Benefit changes are a consideration in any discussion of Social Security reform because they can provide a solution, or a partial one, to addressing Social Security’s long-term funding challenge to the extent benefits are reduced. In addition, benefit changes such as adding a minimum benefit for certain beneficiaries could address what some see as existing weaknesses with the system for the economically vulnerable. Changing demographics also highlight the need for modernization of certain provisions.
The Social Security Trustees Report is issued annually and contains 75-year financial projections of the expected income, benefit payments and expenses. To make Social Security solvent for the next 75 years through immediate benefit cuts only, benefits would need to be reduced by about 19 percent for all current and future beneficiaries (or 23 percent if applied only to those eligible in the future, protecting current beneficiaries from any cuts). If decreases are delayed to 2035 (the year the trust fund reserves are projected to be depleted), needed benefit decreases for all current and future beneficiaries would be about 25 percent (and benefit decreases would not be enough to achieve 75 years of solvency if only applied to benefits for those beneficiaries eligible in the future). The considerable size of such a proposed reduction, especially for current retirees, is why many Social Security reform proposals generally also include changes to the current payroll tax structure.
Besides an across-the-board decrease, other approaches that could change benefits and alter Social Security’s long-range finances are described below. Note that there is a separate American Academy of Actuaries’ election guide on raising the Social Security full retirement age (FRA), which would have the same impact as reducing benefits.
Should Cost-of-Living Adjustments (COLAs) Be Altered to Reduce Social Security’s Costs?
Some argue the consumer price index (CPI)1—used by Social Security to calculate annual COLAs overestimates inflation and therefore support using the “chained CPI” in order to reduce Social Security’s deficit. The Chained Consumer Price Index for All Urban Consumers supplements the existing indexes already produced by the U.S. Department of Labor and reflects that consumers change their buying habits when prices for some goods increase more rapidly than others. The likely impact of this change would be that annual COLA benefit adjustments would grow at a slower rate, about 0.3% slower than under the current CPI. Supporters say a change in the COLA could be implemented quickly without radically restructuring the program, and, unlike other changes, could be applied to people already retired. The impact of this change would be very small at first but would compound over time, impacting the oldest old (which, on balance, more heavily affect women, who on average live longer) to a greater extent. Therefore, there are concerns that many retirees, especially those with lower incomes, would find it difficult to adjust to this change because much of their income is fixed and they have fewer options to make up for a benefit cut.
Should COLAs Be Changed to Reflect the Different Purchasing of the Elderly?
Proposals have been made to adjust the program’s COLA based on the spending patterns of seniors.
The Department of Labor’s Bureau of Labor Statistics constructed an experimental CPI for the Elderly (CPI-E) based on a typical basket of goods and services for retirees, and the index has risen by an average of about 0.2% a year faster than the current CPI because health care expenses are more heavily weighted. Some propose using the CPI-E or other methods of recalibrating the calculation of COLAs, but they would typically increase Social Security’s funding challenge.
|The Academy’s Social Security Game
Explore options for Social Security reform and how changes will affect younger workers, retirees, and the program’s long-term health.
Should Social Security’s Primary Benefit Formula Be Changed?
Social Security benefits are calculated by averaging workers’ highest 35 years of earnings and then applying a formula to calculate a retiree’s primary insurance amount (PIA) benefit. This formula uses bend points (annually adjusted dollar amounts in the PIA formula that change with the national average wage index) that provide a higher percentage of benefits to lower-income contributors and reduces the percentage for higher-income contributors. While workers who contribute more into the system receive higher retirement benefits, the formula is designed to pay a higher percentage of benefits to beneficiaries who had lower earnings during their working years relative to their contributions.
To reduce Social Security costs, some have proposed modifying the PIA formula in ways that would lower benefits for everyone but reduce them more for retirees who had the highest income. Another suggestion is to average 38 or 40 years of workers’ earnings, which would take into account lower-income or zero-income years and ultimately reduce benefits. This change would have a disproportionate impact on women who typically spend more years out of the work force (and therefore would have zero earning years calculated in their average) due to caregiving responsibilities for children and family members. Some proposals have included provisions to grant limited caregiver credits for those with years out of the work force or who worked part time due to caregiving responsibilities.
Should Spousal and Widows Benefits Be Changed?
At full retirement age (FRA), the lower-paid, or nonworking, spouse receives 50 percent of the other spouse’s benefit unless the lower-paid spouse can receive a higher benefit based on his or her own earnings history. When one spouse dies, the survivor receives either 100 percent of the deceased spouse’s benefit or the surviving spouse’s own benefit, whichever amount is higher. The results of these rules may not be as expected. For example, a couple with similar work histories and wages will find their total Social Security benefits cut in half when one of them dies. However, for a single-earner couple (where the one earner is more likely to be highly paid), their total benefits will drop by only one-third. Thus, the couple with one worker gets a subsidy compared to the couple where both work.
Social Security also pays benefits to former spouses, dependents, and parents in certain circumstances.
Spousal benefits under Social Security were established during an era when single wage earners predominated. Some question whether the same level of spousal benefits is still necessary because most workers now qualify for benefits based on their own earnings. The number of women age 62 and older who receive a benefit based on their husband’s work record alone declined to 21 percent in 2017 and likely will decline further in the future. Under current rules, two-earner couples receive proportionately lower benefits compared to one-earner couples earning the same amount relative to the Social Security taxes paid on their behalf.
To remedy this inequity, proposals have been made to reduce the benefits for nonworking spouses, possibly from 50 percent to 33 percent, with some proposals varying this reduction by income to help lower-income couples. With the increasing labor force participation of women, survivor benefits as a percent of the couples combined income has been declining. In response, there have been proposals that provide the survivor a minimum benefit, such as 75 percent of the couple’s combined benefits. While this minimum benefit would cost more than the current provision, it could be combined with a reduction in the spousal benefit such as the one described above which would lower costs to the Social Security program.
Should Social Security Be Means-Tested?
One way to reduce Social Security costs is to reduce or eliminate benefits paid to wealthier retirees. Advocates say that reducing or eliminating benefits for those whose income or assets exceed certain thresholds would help preserve Social Security as a safety net for those who truly need it. Opponents say it would fundamentally alter the program that pays benefits to all workers who contribute into the system and could erode support for the program, especially by the wealthier, who might view Social Security as simply another welfare benefit. In addition, it could discourage personal savings, because if someone had a high amount of savings, a means test could reduce or even eliminate their Social Security benefit. Note that Social Security benefits are not taxed for those whose income is less than $25,000 if single and $34,000 if married. Wealthier taxpayers pay income taxes on up to 85 percent of their Social Security benefits; those taxes are deposited into the Social Security trust funds. This could be considered as a means test of sorts.
Many different types of benefit changes have been proposed—some to address the financial challenges of Social Security and others to strengthen benefits for certain beneficiaries.
Should Social Security Have a Minimum Benefit?
Implementing a minimum benefit level has been included in a number of Social Security reform proposals. While many of the proposals are focused on improving Social Security’s financing, there is also recognition that some retirees rely solely on Social Security for their retirement income. Having a minimum benefit level could help keep these retirees or surviving spouses out of poverty. On the other hand, it could discourage some people from working and saving for retirement. Others would say that minimum benefits belong in Supplemental Security Income (SSI), not Social Security.
A minimum benefit could be provided to those who had low wages over the course of their careers. The actual minimum benefit amount could be dependent on a worker’s retirement age as well as how many years they had in the work force. It could be implemented at retirement or a later date, such as 20 years after retirement.
Widows, especially the oldest old, are also a group who often end up in poverty due to the low level of their spousal survivor benefits and the exhaustion of any other assets and their longevity. Proposals could be designed to address this situation.
From its inception, Social Security has had elements of individual equity and social adequacy. Individual equity means basing a worker’s benefit on their wage history. Social adequacy means basing a worker’s benefit on their deemed financial need. Both of these are essential to the success of Social Security to ensure public support and an adequate level of income for covered workers. Many different types of benefit changes have been proposed—some to address the financial challenges of Social Security and others to strengthen benefits for certain beneficiaries. All of the options have different impacts on individual workers/retirees as well as different levels of cost savings, so these trade-offs need to be evaluated in light of the Social Security system’s dual goals of individual equity and social adequacy, and the need to bring Social Security back into financial sustainability.
The 2020 Social Security Trustees Report does not reflect the COVID-19 pandemic and states that the magnitude of near-term and long-range effects on the population and economy is unclear. For example, payroll tax revenues will decline in 2020, which will have a detrimental impact on Social Security financial projections and would likely change some of the numbers in this guide. Such potential effects of the pandemic illustrate a need to consider Social Security reforms in the near term so that a wider range of options that might provide a more gradual approach to benefit or revenue changes can be considered.
Additional Resources From the Academy
- Social Security Reform Options
- Academy Essential Elements Paper on Social Security
- An Actuarial Perspective on the 2020 Social Security Trustees Report
- Helping the ‘Old-Old’—Possible Changes to Social Security to Address the Concerns of Older Americans
1 The CPI is a measure of the average change over time in the prices paid by consumers for goods and services.