NCPA - National Center for Policy Analysis

MEANINGFUL BENEFIT CUTS

January 28, 2005

One of the largest Social Security benefit cuts took place in 1977, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis. It was necessitated by a legislative mistake in 1972. Previously, benefits were not automatically adjusted for inflation once people began receiving them. From time to time, Congress would enact ad hoc benefit increases to compensate for inflation.

Unfortunately, Congress inadvertently over-indexed Social Security to inflation in 1972. As a consequence, real benefits were projected to rise very sharply:

  • An average worker would have seen them rise as a percentage of his last working year's wages from 44 percent in 1980 to 68 percent by 2050 in the absence of legislative action.
  • A low-income worker would have seen his replacement rate rise from 56 percent to 106 percent and a high-income worker would have seen it go up from 34 percent to 48 percent.

In 1977, Congress changed the law to stabilize replacement rates at 55 percent for low-income workers, 43 percent for average workers and 29 percent for high-income workers. In the process, it changed the way initial benefits were calculated so that they became indexed to wages rather than prices. Since real wages rise over time, the result was to program into Social Security an increase in real benefits every year for new retirees.

This very substantial reduction in Social Security benefits did not lead to an outcry or retaliation against those voting for them. If explained properly, people are willing to accept reductions in future benefits, says Bartlett.

Source: Bruce Bartlett, "Meaningful Benefit Cuts," National Center for Policy Analysis, January 26, 2005.

 

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