Social Security Benefits are Modest
Policymakers Have Only Limited Room to Reduce Benefits Without Causing Hardship

PDF of this report (7pp.)

By Kathy Ruffing and Paul N. Van de Water

January 11, 2011

Social Security benefits may be on the chopping block as policymakers wrestle with the nation’s long-term fiscal challenges.  The co-chairs of the President’s fiscal commission, Erskine Bowles and Alan Simpson, proposed a plan to ensure Social Security’s long-term solvency that relies on benefit cuts for two-thirds of its savings over the next 75 years, and four-fifths of the savings in the 75th year.  A panel convened by the Bipartisan Policy Center proposed a package that relies roughly equally on benefit cuts and tax increases.  The Center for American Progress has offered a plan in which tax increases on employers dominate. [1]

In assessing Social Security proposals, policymakers need to keep five key facts in mind:

  1. Social Security benefits are quite modest.
  2. The majority of beneficiaries have little significant income from other sources.
  3. For most seniors, Social Security is the only income they will receive that is guaranteed to last as long as they live and to provide full inflation protection.
  4. Social Security benefits in the United States are low compared with other advanced countries.
  5. Future retirees already face lower benefits (relative to their past earnings) than current retirees as a result of a rising Social Security retirement age and escalating Medicare premiums.

All of those facts argue for limiting any cuts in future benefits — a position that the majority of the public appear to support. [2]

Social Security’s financial challenge is real but is manageable in size.  The program’s trustees project that it is solvent until 2037, and that in the mid-2030s, when the large baby boom generation exerts its greatest demographic pressure, benefits will cost just over 6 percent of the Gross Domestic Product, up from 4.8 percent today.[3]  There is no imminent crisis, and policymakers have time to do the job right, although it is desirable to act sooner rather than later.  The major reason for acting sooner is that a carefully crafted solvency package can restore public confidence in the program, share sacrifices fairly across generations, and give workers plenty of notice so that they can plan their work, savings, and retirement. [4]

1.  Social Security Benefits Are Modest

Table 1:
Social Security Benefits Are Modest
Beneficiaries and average amount, December 2010
  Beneficiaries
(millions)
Average amount
Monthly Annually
Retired workers 34.6 $1,175 $14,105
Disabled workers 8.2 1,068 12,813
Aged widow(er)s 4.0 1,134 13,607
Source:  Social Security Administration, Office of the Chief Actuary (http://www.ssa.gov/OACT/ProgData/icp.html).  These three groups account for nearly 90 percent of Social Security’s 54 million beneficiaries and over 90 percent of its benefit outlays.

In December 2010, the average benefit for the three principal groups of Social Security beneficiaries — retired workers, disabled workers, and aged widows and widowers — was only about $1,100 a month, or $14,000 a year.  (See Table 1.)  That’s less than 30 percent over the poverty level. [5]  These modest average benefit levels help to explain why, although the poverty rate is lower for the elderly than for other age groups, many older people are near-poor. [6]

While there is no explicit dollar cap on Social Security benefits, top benefits are modest as well.  This is because Social Security caps the amount of earnings on which workers pay taxes and accrue credit toward future benefits, and because the program’s progressive benefit formula replaces a greater share of past earnings for low-paid workers than high-paid ones.  In December 2010, 95 percent of retired workers — and even larger percentages of disabled workers and aged widow(er)s — received monthly benefits of less than $2,000. [7]

2.  Most Beneficiaries Have Little Significant Income From Other Sources

Social Security is the foundation of retirement income.  Of course, most beneficiaries have other income as well — from pensions, investments, earnings, and (for some of the poorest) from needs-tested programs such as Supplemental Security Income (SSI).  But on average, Social Security provides nearly two-thirds of income for beneficiaries 65 and older. 

Table 2:
Social Security Benefits Make Up Large Share
of Beneficiaries’ Total Income
Beneficiary Units 65 or Older, 2008
Benefit Quintile Benefit Amount Median Total Income
First Up to $9,989 $10,517
Second $9,989 - 13,157 $14,100
Third $13,157 - 16,757 $20,579
Fourth $16,757 - 22,757 $30,000
Fifth $22,757 and up $49,906
Source:   Social Security Administration, Income of the Population 55 or Older, 2008, Table 3.A6.   Data are for “aged units” — unmarried people 65 or older, and married couples in which at least one spouse is 65 or older.  Each quintile contains one-fifth of all such units, so that the third quintile represents the overall median.

Dependence on Social Security rises with advancing age, as fewer people work and more of them deplete their other income sources.  Among beneficiaries 80 and older, Social Security represents nearly three-fourths of income. [8]  For about one-fifth of elderly beneficiaries, Social Security is the only source of cash income. [9]

In 2008, the median beneficiary 65 or older had a total household income of about $20,000 a year, most of it from Social Security.  (See Table 2.)  Married-couple beneficiaries had a median income of about $35,000, while non-married beneficiaries had just $15,000.

Some have proposed cutting Social Security benefits while sparing the bottom one-fifth, or bottom one-third, of beneficiaries.  But as these data show, that would still cut benefits for large numbers of recipients who are not affluent and have little other income.  Only a minority of retirees — chiefly those who are younger, married, and (often) still working — have significant income from other sources.

3.  Most Beneficiaries Will Lack Other Pension Benefits

Relatively few future retirees can count on one traditional mainstay of retirement income:  an employer-provided, defined-benefit pension plan.  Coverage under such plans has fallen precipitously.  (See Figure 1.)  That trend has led researchers at the Urban Institute and the Social Security Administration to warn about “the disappearing defined benefit pension,” which will have a significant impact on baby boomers now approaching retirement.[10]

In many cases, employers have switched to defined-contribution plans that shift the financial risks to their employees.  As Americans seek to stretch their savings in 401(k)s, IRAs, or other vehicles (which can produce volatile and uncertain returns) to cover their full lifespan — whose length they cannot predict — maintaining Social Security’s guarantee of lifetime, inflation-adjusted income will become even more important.

4.  Social Security Benefits in the United States Are Low Compared With Other Advanced Countries

Governments around the world are feeling fiscal pressure, and some are adopting austerity programs that trim retirement benefits.  Why, some commentators ask, should the United States be different? They ignore the fact that most other developed countries have considerably more generous public-pension systems than the United States.

The Organisation for Economic Cooperation and Development (OECD) has tallied the percentage of past earnings that the public-pension system replaces for various workers.  For a median worker, the U.S. ranks 26th out of the 30 OECD nations.  (See Figure 2.)  The average OECD nation has a public-pension program that replaces about 61 percent of earnings for a median worker; the U.S. system is only two-thirds as generous.

5.  Future Retirees Already Face a Benefit Squeeze

Social Security has always aimed to provide retired or disabled wage-earners (or their survivors) with a benefit that replaces a reasonable fraction of their lost earnings.  Benefits make up a larger fraction of past earnings for lower-paid workers than for higher-paid workers, which is one of the program’s progressive features.  In Social Security jargon, lower-wage workers receive a higher “replacement rate.”

Although individual circumstances vary, financial planners recommend as a rule of thumb that retirees aim to build a portfolio — from Social Security, pensions, and savings — that replaces 70 percent of their previous income. [11]  Social Security will get them only partway toward that goal.  For a medium worker (with earnings of about $43,000 in 2010 dollars) who retires at age 65 in 2010, Social Security will replace only about 41 percent of previous earnings.  And that figure will fall as the program’s age for full benefits (sometimes referred to as the “normal retirement age” or “full retirement age”), which increased from 65 to 66 in the past decade, rises further from 66 to 67 (see box).

Furthermore, rising Medicare premiums will take a growing bite out of beneficiaries’ Social Security checks in coming years.  Most beneficiaries 65 and older, along with most disabled workers under age 65, participate in Medicare’s Supplementary Medical Insurance program (“Medicare Part B”) and have the premium ($110 in 2010) deducted from their Social Security checks.  Most also enroll in the prescription-drug program, Medicare Part D, although they pay the premium (which averages $30 a month in 2010) to their chosen plan rather than having it deducted from their check. 

Why Does Raising the Retirement Age Reduce Benefits?

The full retirement age is 66 and will rise to 67 for people born in 1960 and later. Raising the retirement age amounts to an across-the-board cut in benefits, regardless of whether a worker files for Social Security before, upon, or after reaching the full retirement age.  A one-year increase in the full retirement age is equivalent to a roughly 7 percent cut in monthly benefits for all retirees who are affected.

Raising the Full Retirement Age
Reduces Benefits for Everyone
Illustrative monthly benefit,
if claimed at age  —
Full Retirement Age
65 66 67
62 $800 $750 $700
63 867 800 750
64 933 867 800
65 1,000 933 867
66 1,080 1,000 933
67 1,160 1,080 1,000
68 1,240 1,160 1,080
69 1,320 1,240 1,160
70 1,400 1,320 1,240
Source:  Center on Budget and Policy Priorities.  Estimates assume a Primary Insurance Amount, or full benefit, of $1,000 a month and an increase in the monthly benefit of 8 percent for each year that an individual delays drawing benefits beyond the full retirement age.  The full retirement age rose gradually from 65 to 66 for people who reached 62 in 2000 through 2005, and will climb from 66 to 67 for people who turn 62 in 2017 through 2022.

The full retirement age really just means the age at which full benefits are paid.a  Workers can file sooner and collect permanently reduced monthly benefits, or they can file later and get larger monthly benefits.  Shifting the retirement age means that the early retiree gets a deeper reduction and the delayed retiree gets a smaller bonus.

When the full retirement age was 65, a worker who filed at 62 — as do about half of claimants — could get 80 percent of a full benefit (or $800, if his or her full benefit were $1,000).  Now that the full retirement age is 66, a worker who files at 62 gets 75 percent of a full benefit ($750, in this example); when the full retirement age rises to 67, a worker who files at 62 will get just 70 percent (or $700, in our example).  That reduction in monthly benefits lasts for the rest of his or her life. 

And at the other extreme, someone who waits until 70 to file now gets nearly a one-third bonus — or $1,320, assuming that his or her full benefit is $1,000.  Eventually that will shrink to about one-quarter — or $1,240, in our example.  In short, an increase in the retirement age reduces benefits across the board.

a.  The only other major significance of the full retirement age is that the Social Security earnings test no longer applies.  Early retirees now give up $1 of benefits for each $2 by which their annual earnings exceed $14,160 (and give up $1 in benefits for every $3 of earnings over $37,680, if they will reach age 66 later in the calendar year).  After age 66, these offsets cease to apply.

As health-care costs continue to outpace wage growth, those premiums will eat further into future retirees’ Social Security checks.  A medium earner retiring at 65 in 2010 finds that his Social Security check replaces only about 37 percent of past earnings, after paying Medicare premiums.  By 2030, that figure will be about 32 percent — the result of the scheduled increase in the Social Security retirement age and steeper Medicare premiums as health-care costs continue to climb.  (See Figure 3.)

Conclusion

Social Security benefits in the United States are modest both in dollar terms and by international standards, and most beneficiaries do not have significant income from other sources.  Some reductions in future Social Security benefits may be necessary as part of a bipartisan solution to restore the program’s long-term solvency.  But any benefit reductions will need to be modest, carefully targeted, and phased in gradually to give those who will be affected ample notice and time to adjust.

 

 

 

End Notes:

[1] Statement of Robert Greenstein and James Horney on the Final Report from the Co-Chairs of the Deficit Commission, Center on Budget and Policy Priorities (CBPP), December 1, 2010; James Horney, Paul N. Van de Water, and Robert Greenstein, “Bowles-Simpson Plan Commendably Puts Everything on the Table But Has Major Deficiencies Because It Lacks an Appropriate Balance Between Program Cuts and Revenue Increases,” CBPP, November 16, 2010;  Horney, Van de Water, and Greenstein, “Rivlin-Domenici Deficit Reduction Plan Is Superior to Bowles-Simpson in Most Areas But Health Proposal Is Very Troubling,” CBPP, November 30, 2010; Christian E. Weller , “Building It Up, Not Tearing It Down: A Progressive Approach to Strengthening Social Security,” Center for American Progress, December 2010.

[2] “Social Security 75th Anniversary Survey Report: Public Opinion Trends,” AARP, August 2010; Virginia P. Reno and Joni Lavery, “Economic Crisis Fuels Support for Social Security: Americans' Views on Social Security,” National Academy of Social Insurance, August 2009.

[3] Kathy Ruffing and Paul N. Van de Water, “What the 2010 Trustees’ Report Shows about Social Security,” Center on Budget and Policy Priorities, August 13, 2010.

[4] Charles Blahous and Robert Greenstein, “Social Security Shortfall Warrants Action Soon,” Pew Fiscal Analysis Initiative, November 2010.

[5] Using the poverty guideline published by the U.S. Department of Health and Human Services, which is $10,830 in 2010 for one person in the 48 contiguous states and District of Columbia.  See http://aspe.hhs.gov/poverty/10poverty.shtml.

[6] Income, Poverty, and Health Insurance Coverage in the United States: 2009, U.S. Department of Commerce, Bureau of the Census, September 2010, http://www.census.gov/prod/2010pubs/p60-238.pdf.

[7] http://www.ssa.gov/OACT/ProgData/benefitlevel.html.

[8] Income of the Population 55 or Older, 2008 , Social Security Administration, April 2010 ( http://www.socialsecurity.gov/policy/docs/statcomps/income_pop55/2008/incpop08.pdf ), Table 9.A1.

[9] Ibid.

[10] Barbara A. Butrica, Howard M. Iams, Karen E. Smith, and Eric J. Toder, “The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers,” Social Security Bulletin, Vol. 69, No. 3 (2009).

[11] John Karl Scholz and Ananth Seshadri, “What Replacement Rates Should Households Use?,” Michigan Retirement Research Center, Working Paper 2009-214, September 2009, http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp214.pdf.

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