The chief actuary of the Social Security Administration released a report this week analyzing several proposals that aim to change how Social Security benefits are calculated. Almost all the fixes studied will result in smaller benefit checks for most seniors, especially for high income and younger retirees. Here’s a look at how three of the proposed changes could impact your Social Security payout.
Raise the retirement age. The age seniors can claim their full retirement benefits is already in the process of being raised from age 65 to 67. Under current law a worker who earns an average of $43,084 over the 35 highest earning years of his career will get $1,397 each month from Social Security upon signing up at age 65 in 2010. An individual with a similar earnings history who claims at age 65 in 2080 will get $1,249 (in wage indexed 2010 dollars) under current law. Further raising the retirement age reduces benefits for all retirees born after the cutoff date. If the retirement age was gradually increased by 2 months per year until it reaches age 70, a worker with a similar earnings history who claims at age 65 in 2080 would get 19 percent less or $1,009 each month (in wage indexed 2010 dollars), according to the SSA report.
Change the benefit formula. Some lawmakers have proposed tying initial benefit payments for some retirees to price levels rather than wage levels, which is often called partial price indexing. Under current law, a worker who earns an average of $43,084 over 35-years would receive $1,245 per month upon reaching age 65 in 2040. If progressive price indexing were implemented for all but the lowest 30 percent of earners starting for those newly eligible in 2018, that same worker would receive nearly 12 percent less or $1,097 monthly. The benefit cut would be even deeper for younger generations. A newly retired worker with the same average wages in 2080 would get $897 per month if this form of partial price indexing were implemented, 28 percent less than the $1,249 per month he would be paid under current law. There is an even larger decrease in benefits for high income workers. Someone who earned an average of $106,800 over a 35-year career would receive $2,019 per month upon reaching age 65 in 2080 using the current benefit formula, an amount which would fall by 50 percent to $1,010 if partial price indexing were implemented.
Adopt an alternative measure of inflation. Social Security payments are adjusted each year to keep up with inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. However, some lawmakers would prefer to use a different measure of inflation, the chained CPI-W, starting in Dec. 2012. This measure has historically produced a 0.3 percent smaller annual cost-of-living adjustment on average. “Using this modified CPI for the cost-of-living adjustment would result in annual reductions in the benefit that would accumulate with the number of years that elapse,” writes Stephen Goss, chief actuary of the Social Security Administration, in the report. “For example, a retired worker at age 75 would have 13 cost-of-living adjustments applied to benefits and so would have a 3.7 percent lower benefit on average than under current law. The average reduction would be 6.5 percent at age 85 and 9.2 percent at age 95.”