Social Security Benefits Are Modest

Social Security benefits are a perennial target for cuts because the program faces a long-run shortfall. Some lawmakers and opinion leaders mistakenly portray the program’s benefits as lavish. The fact is, benefits are modest and workers have earned them by paying into Social Security — protecting themselves and their families if they retire, become disabled, or die leaving family members to support. Here are five key facts that policymakers need to keep in mind:

1. Social Security benefits are modest.
2. Most beneficiaries rely on Social Security for most of their income.
3. For most seniors, Social Security is the only income they receive that’s guaranteed to last as long as they live and to provide full inflation protection.
4. Social Security benefits in the United States are lower than many other developed countries.
5. Future retirees already face lower benefits (relative to their past earnings) than current retirees because of a rising Social Security retirement age and escalating Medicare premiums.

These facts argue for avoiding cuts in future benefits — a position that the majority of Americans support strongly.^[1]

Social Security faces a real but manageable long-term shortfall. The program’s trustees project that its trust fund reserves will last until 2035, and that even after that, tax revenue anticipated under current law would support three-fourths of scheduled benefits. Social Security’s fundamental challenge is demographic, traceable to a rising number of beneficiaries rather than to escalating costs per beneficiary. In the mid-2030s, when the large baby boom generation exerts its greatest demographic pressure, benefits will cost just under 6 percent of Gross Domestic Product (GDP), up from 5 percent today.^[2]

There is no imminent crisis, and policymakers have time to put Social Security on sound financial footing. However, they shouldn’t wait until the last minute because a carefully crafted solvency package could strengthen public confidence in the program, share sacrifices fairly across generations, and give workers plenty of notice so that they can plan their work, saving, and retirement.

1. Social Security Benefits Are Modest

In November 2019, the average benefit for the three principal groups of Social Security beneficiaries — retired workers, disabled workers, and aged widows and widowers — was only about $1,438 a month, or just over $17,200 a year. (See Table 1.) That’s not even 40 percent over the poverty level, and well below one estimate of the minimum necessary to enable a secure but no-frills retirement.^[3] These modest benefits help to explain why many older people are poor or near-poor — especially under the enhanced definition of poverty that considers their out-of-pocket medical costs.^[4]

While there is no explicit dollar cap on Social Security benefits, top benefits are not excessive. That’s 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 June 2019, nearly 94 percent of retired workers — and even larger percentages of disabled workers and aged widows and widowers — received monthly benefits of less than $2,500.^[5]

2. Most Beneficiaries Rely on Social Security for Most of Their Income

Social Security is the foundation of retirement income. Of course, most beneficiaries have other income as well — from pensions, investments, a job, and (for some of the poorest) from means-tested programs such as Supplemental Security Income (SSI). Social Security provides the majority of income to most elderly Americans. For about half of seniors, it provides at least 50 percent of their income, and for about 1 in 4 seniors, it provides at least 90 percent of income, across multiple surveys and a recent Census Bureau study that matches survey and administrative data.^[6]

Most retirees have modest incomes, save for some at the top of the income spectrum. About 1 in 4 retiree households live on less than $20,000, while the wealthiest tenth of senior households had incomes of $230,000, on average.

The median elderly household had income of about $44,000 in 2012, including Social Security. That figure masks a sharp difference between white and Asian households, which had median incomes of about $47,000 and $48,000, respectively, and Black and Latino households, which had median incomes of about $32,000 and $30,000, respectively.^[7]

Proposals to “means-test” Social Security — by trimming benefits for retirees with other income — wouldn’t save significant money unless they targeted retirees who are not affluent; such measures would also pose high administrative costs and would damage incentives to work and save.^[8]

3. Most Beneficiaries Will Lack Other Pension Benefits

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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 significantly affect baby boomers now in or approaching retirement.^[9] Most low-income elderly households have very little pension income, if any; the majority of elderly households in the bottom third of the income distribution receive no pension income at all, compared to more than 80 percent of those in the top two-thirds.^[10]

Trends strongly indicate that the composition and distribution of retirement income will change significantly. Roughly two-thirds of non-Social Security retirement income in 2012 was from traditional defined-benefit pensions, according to the Census study — but in the private sector those pensions have largely been replaced by defined-contribution plans, which shift the financial risks to employees, for today’s workers.^[11]

Future retirees will be much less likely to have traditional pensions, and more of their retirement income will come from defined-contribution plans and individual retirement accounts, in which balances are highly unequal. 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 Lower Than in Many Other Developed Countries

Governments around the world are feeling fiscal pressure, and some have adopted austerity programs that trim retirement benefits. This has prompted some commentators to ask why the United States should be different. But that question ignores the fact that most other developed countries have more generous public pension systems than the United States.

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The Organisation for Economic Co-operation and Development (OECD) has tallied the percentage of past earnings that the public pension system replaces for various countries. By that measure, the United States ranks in the bottom third among major developed nations. (See Figure 2.) The average OECD nation has a public pension program that replaces half of earnings for an average worker; the U.S. system replaces about 40 percent of earnings.^[12]

5. Future Retirees Already Face a Benefit Squeeze

Social Security has always aimed to provide retired or disabled workers (and 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 parlance, 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 that replaces about 70 percent of their previous income.^[13] Social Security will get them only partway toward that goal. For a medium worker (someone who steadily earned close to Social Security’s average wages, about $52,000 in 2018 dollars) who retires at age 65 in 2020, Social Security will replace about 38 percent of previous earnings.^[14] That figure has fallen in recent years, and will continue to fall further as the program’s age for full benefits (or “full retirement age”), which climbed from 65 to 66 in the past decade, rises further from 66 to 67 as a consequence of legislation enacted in 1983 (see box).

Furthermore, rising Medicare premiums will take a growing bite out of beneficiaries’ Social Security checks. 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 deducted from their Social Security checks. (The Part B premium is $144.60 per month in 2020, with surcharges for the highest-income retirees.) Most also enroll in the prescription drug program, Medicare Part D, although they pay the premium to their chosen insurance plan rather than having it deducted from their check. (The Part D premium averages $33 a month in 2020, again for all but the highest-income retirees.)

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As health care costs continue to outpace wage growth, those premiums will eat further into future retirees’ Social Security checks. Medium earners retiring at 65 in 2020 find that their net Social Security check, after paying Medicare premiums, replaces only about 35 percent of past earnings. By 2030, that figure will be about 32 percent — the combined 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.)