Growth of Social Security Benefits Should Be Slowed

February 13, 2013

Social Security must undertake new measures to correct the substantial financial shortfall that it currently faces, says Charles Blahous, a senior fellow at the Hoover Institution.

  • There are two main options -- increasing program taxes or slowing the growth of benefits.
  • While both are politically unattractive, at least one or the other is necessary to balance the program's books if we intend to maintain Social Security as a self-financing program.
  • Currently, benefits claimed at the normal retirement age are indexed with the national Average Wage Index (AWI), which rises faster than the Consumer Price Index (inflation).
  • Social Security benefits are designed to hold replacement rates -- the ratio of postretirement to preretirement income -- constant across time.

By limiting the growth of benefits, policymakers can ensure that benefits are adequate while at the same time addressing cost-containment concerns. Modifying the current formulas would further the goal of Social Security while reflecting the value judgment that the federal safety net should not automatically expand as real earnings rise.

  • The current formula aims to preserve equity across generations by ensuring that current cohorts receive the same percentage of preretirement wages as previous generations did. In order to do this, a greater tax burden must be levied on current workers. This lowers the standard of living and causes benefits to grow faster than preretirement after-tax income.
  • Social Security also uses a different formula than typically used by financial planners in calculating preretirement income, which leads to replacement rates that are roughly 20 percent higher than is commonly understood. Some low-wage workers may actually receive more in Social Security benefits that they did while working.
  • Real Social Security benefits are growing relative to real wages because the current benefit formula is designed to pay the same replacement rate to "similarly situated workers," not to workers with the same real wages born in different years.

Source: Charles Blahous, "Understanding Social Security Benefit Adequacy: Why Benefit Growth Should Be Slowed," Economic Policies for the 21st Century, January 21, 2013.

 

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