Increasing the Number of Work Years Used to Compute Benefits
Increasing the number of work years used to compute Social Security benefits would reduce program payments and increase work incentives. However, this option would disproportionately reduce payments to low-wage beneficiaries.
Background
Social Security pays retirement benefits based on the highest 35 years of a worker’s covered earnings (called computation years). Disability and Survivor Insurance benefits are sometimes based on fewer years depending upon the age at which the worker’s disability started or the worker died.
Why Raise Computation Years?
- To improve the system's long-term fiscal situation: Increasing computation years without other changes to the benefit formula would reduce benefits, because many beneficiaries have worked fewer than 35 years (figure 1). Also, for those who have worked more, earnings beyond the 35th year are lower than those in the highest 35 years.
- Work experience is increasing for women (figure 2), but women still average fewer work years than men.
Source: Favreault and Steuerle (2008), tabulated from Survey of Income and Program Participation matched to Social Security earnings records.
Note: A covered work year is defined as one with at least four covered quarters of earnings.
Source: Favreault and Steuerle (2008), tabulated from Survey of Income and Program Participation matched to Social Security earnings records.
Note: A covered work year is defined as one with at least four covered quarters of earnings.
- To increase equity: Social Security currently pays higher benefits to some workers whose earnings are concentrated within 35 years than to others who earnings are spread over more years. For example, a worker who earns $40,000 per year for 35 years would receive higher benefits than one who earns $35,000 per year for 40 years, even though they pay the same lifetime payroll taxes.
- To improve work incentives: Additional contributions to the program do not always translate into additional Social Security benefits.
- Work beyond the 35 years of employment does not increase Social Security retirement benefits if the annual amount earned is not among the worker’s highest 35 years of earnings.
- Even if earnings are among the highest 35 years, the benefit increase is often small relative to additional taxes paid.
- To account for increases in life expectancy: Social Security computation years have not changed since the current benefit calculation method was established in 1977.
- Since that time, life expectancy at age 65 has climbed by almost three years for men (from 13.9 years in 1977 to 16.8 years in 2008), and by nearly one year for women.
Why Not Raise Computation Years?
- Unless accompanied by other formula changes, increasing computation years would tend to reduce benefits proportionately more for workers with less education and lower wages, because they tend to have shorter careers than high-wage workers with more education (Favreault and Steuerle 2008).
- Formula changes could offset these regressive effects.
- The change would disproportionately affect women workers because they are less likely than men to work 35 or more years (figure 1).
- Some women do receive spouse and survivor benefits that are based on their husband’s earnings rather than their own, and these benefits could become more significant if the computation years were increased.
Are There any Additional Complications about Raising Computation Years?
- Designers need to consider whether they would adjust the benefits of disabled and deceased workers when increasing computation years.
What Would Be the Impact on Social Security’s Long-Term Fiscal Deficit?
- Social Security actuaries estimate that increasing the number of computation years to 38 (gradually phased in over the 2009-2013 period and exempting disabled workers) would reduce Social Security’s long-run fiscal deficit by about 18 percent of the projected 75-year deficit.
- Increasing to 40 computation years (phased in from 2009 through 2017, again excluding disabled workers) would reduce the long-term deficit by about 29 percent.
Who Has Proposed Increasing Computation Years?
- Aaron and Reischauer (1998);
- Advisory Council on Social Security 1994-96;
- Goda, Shoven, and Slavov (2006), who propose other related adjustments;
- National Commission on Retirement Policy (1998), and related legislation;
- Steuerle and Spiro (1999).
Distributional Effects
The Retirement Policy Program at the Urban Institute uses the DYNASIM3 computational model to estimate the effects of different Social Security reform designs on different groups of Americans. See our latest estimates here.
See the Following Reports to Learn More:
Favreault, Melissa M. and C. Eugene Steuerle. 2008. “The Implications of Career Lengths for Social Security.” Retirement Policy Discussion Paper No. 08-03. Washington, DC: The Urban Institute.
Steuerle, C. Eugene and Christopher Spiro. 1999. “Should the Social Security Benefit Formula Include Every Year Worked?” Straight Talk on Social Security and Retirement Policy, No. 13. Washington, DC: The Urban Institute.
Other References:
Aaron, Henry J. and Robert D. Reischauer. 1998. Countdown to Reform: The Great Social Security Debate. New York: Century Foundation.
Advisory Council on Social Security [1994-1996]. 1997. Report of the 1994-1996 Advisory Council on Social Security. Volume 1: Findings and Recommendations. Volume 2: Reports of the Technical Panel on Trends and Issues in Retirement Savings Technical Panel on Assumptions and Methods and Presentations to the Council. Washington, DC: Author.
Office of the Chief Actuary, Social Security Administration (OCACT). 2008. Provisions that Could Change the Social Security Program. http://www.ssa.gov/OACT/solvency/provisions/index.html
Goda, Gopi Shah, John B. Shoven, and Sita Slavov. 2007. Removing the Disincentives in Social Security for Long Careers. NBER Working Paper No. 13110. Cambridge, MA. http://www.nber.org/programs/ag/rrc/
NB06-06%20Goda,%20Shoven,%20Slavov%20FINAL.pdf.
National Commission on Retirement Policy. 1998. The 21st Century Retirement Security Plan. Washington, DC: Center for Strategic and International Studies.
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