Since its founding, the Social Security system has made a promise to the American worker: A fraction of the money put into the system via taxes during our working lives will be repaid when we retire. This principle remains a core part of the system, with a worker’s payroll tax contribution the basis for their future benefit level.

A new proposal from the Committee for a Responsible Federal Budget (CRFB) would undermine that core principle. CRFB has proposed creating caps on Social Security benefits, which would improve the progressivity of the Social Security system—in which workers with lower earnings receive a greater replacement of their earnings than workers with higher earnings—but would also eventually reduce benefits for middle-income Americans.

How does the CRFB proposal affect Social Security benefits?

The CRFB proposal seeks to slow or stop the growth of the maximum Social Security benefit depending on when a worker starts claiming benefits. For a worker starting benefits at the full retirement age (FRA), the cap starts at $50,000. For a beneficiary taking benefits at 62, the cap would be $35,000, and someone delaying benefits until age 70 would have a cap of $62,000. At all ages, the cap would double for couples.

Almost no retirees currently receive benefits at the FRA level that CRFB proposes to cap, and the nonprofit acknowledges that their headline policy—the cap of $50,000 each for married couples claiming at FRA—would affect only 0.05 percent of couples today. If these caps were adjusted for wage growth every year like initial Social Security benefits are, then they would produce little or no savings.

Time-based benefit adjustments, not caps, drive long-term savings

CRFB illustrates a few ways to adjust benefit caps over time without specifically endorsing any one approach. Specifically, CRFB presents the following scenarios :

• One of them would index the caps to the “chained” consumer price index, a price inflation measure that has typically grown slower than average wage growth and slower than the price inflation measure currently used to provide annual cost-of-living adjustments for Social Security beneficiaries.
• Caps could be locked at proposed levels for 20 or 30 years and indexed to wages thereafter. A 20-year freeze starting in 2006, for example, would have resulted in a maximum benefit roughly half the current level in 2026.

This article explores the implications of the first option, adopting inflation indexing over the long term.

The shift from indexing benefits on wage growth to indexing on inflation gradually drives system savings, especially given the use of the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). Average wages have grown by an average annual rate of about 3.9 percent since 2000, which ensures that Social Security benefits keep up with rising living standards. CRFB’s proposal would change to indexing based on the C-CPI-U, which grew by about 2.5 percent per year on average over that same period. This “price-indexing” change would gradually flatten Social Security’s benefit formulas.

The type of indexing rules implemented will greatly affect the outcomes of the CRFB proposal, and their effects should be looked at over the long run and across different parts of the earnings distribution. For example, a worker who has had earnings at the taxable maximum ($184,500 this year) for 35 years would receive an annual benefit of slightly less than $50,000 at age 67. A $50,000 cap on benefits with no changes in indexing rules would therefore produce little or no savings.

In terms of how much benefits replace wages while working, a worker with the maximum wage history currently has 30 percent of wages replaced by Social Security if they start claiming benefits at age 67 and 21 percent if they claim benefits at age 62. Under the CRFB proposal with chained CPI indexing, Social Security would replace 22 percent and 16 percent of wages after 20 years for a maximum earner starting benefits at 67 and 62 years, respectively. Over 50 years, wage replacement drops to 15 percent and 10 percent.

However, not indexing the caps would lead to even more dramatic outcomes than price indexing. Not indexing for decades would mean these caps would cut benefits well into the middle class. CRFB’s analysis shows that a 30-year freeze would result in benefit cuts that reach more than half of Social Security beneficiaries.

Combining dollar cutoffs with changes in indexing fundamentally alters the structure and philosophy that have guided Social Security for the past 90 years. Before enacting these kinds of changes, policymakers need to evaluate proposals in terms of these eventual benefit levels; essentially, what the policy would look like today if it had been enacted decades ago.

Social Security needs reform

The retirement portion of Social Security is projected to reach trust fund exhaustion in 2032, meaning the program will only be able to pay out what it takes in each month. Changes to the system need to focus on long-term sustainability. Congress last made fundamental changes in 1983, so any changes in the coming years may also last for generations to come.

The CRFB proposal is a moderate version of other recent proposals to flatten the Social Security benefit, dramatic changes that go beyond what is needed to achieve program solvency. The genius of Social Security is that all income groups get back at least some of what they put in. Undermining this linkage will erode support for the program among high-wage earners and threaten the program’s current broad-based support.

Capping maximum benefits in a manner that compounds over time is not the only means to improve the progressivity of Social Security benefits. In a Social Security plan I coauthored with Wendell Primus and Tara Watson, we propose raising the retirement age only for high earners to recognize that the gains in life expectancy are concentrated among that cohort. We also tax all Social Security benefits for high-income beneficiaries instead of only a portion of benefits.

In subsequent analysis, the benefit levels in this plan should be compared with those in the CRFB options as well as other proposals to flatten the Social Security benefit. The impact of the proposals should be analyzed in terms of short- and long-term benefits.

The Social Security policy debate needs new ideas—but not at the expense of undermining the long-standing support for the program. Policymakers must ensure that any changes preserve the program’s core ethos while extending its solvency.