Thanks to a new analysis by Social Security’s chief actuary of several possible changes to the program — which the House Subcommittee on Social Security released today — we can calculate the size of the Social Security benefit reductions that Rep. Paul Ryan’s much-discussed budget plan would generate (I analyzed the Ryan plan as a whole earlier this year. Here’s my new analysis of the plan’s Social Security component.)
Rep. Ryan’s plan would significantly cut Social Security benefits for future retirees in two ways. First, it would reduce benefits for the top 70 percent of wage earners by basing initial benefits for new retirees on changes in prices rather than changes in wages. (In the long run, prices grow less rapidly than wages.) Second, it would reduce benefits for retirees at all earnings levels by increasing Social Security’s full retirement age even more than it is scheduled to rise under current law. (An increase in the age at which retirees can receive “full” benefits is equivalent to an across-the-board cut in benefits.)
The effects of these two benefit cuts would be cumulative — and they would be significant, as the graph makes clear. Initial benefits for new retirees relative to average wages would decline at all earnings levels, but especially for higher earners. By 2080, the maximum earner would receive little more that the medium earner, despite having paid much higher payroll taxes during his or her working years.
By 2080, the benefit of a medium earner (someone earning $43,000 in today’s terms) would be 46 percent below today’s wage-indexed amount, the benefit of a higher earner (earning $69,000) would be 56 percent lower, and the benefit of someone who earns the maximum taxable amount (currently $106,800) would be 61 percent lower. These reductions include the 7-percent cut in benefits resulting from the increase in the full retirement age that is already scheduled in law.
These are deep cuts. Social Security benefits are modest; the average retirement benefit is only $14,000 a year. Most elderly beneficiaries rely on Social Security for a majority of their income. And as traditional pensions become less common, Social Security will be the only guaranteed, inflation-protected source of income that most people will have.
Moreover, large benefit cuts such as those under the Ryan plan are unnecessary. A mix of payroll tax increases and modest benefit reductions — carefully crafted to shield the neediest recipients and give ample notice to all participants — could put Social Security on a sound financial footing indefinitely.