The Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings recently proposed reforms to pensions and Social Security to better prepare workers for retirement. As a member of the commission, I chose not to endorse the report.
Under the reforms, workers who experience the greatest challenges in the labor market could still face financial insecurity in retirement. The reforms would expand pension coverage, restore Social Security’s long-term solvency, and attempt to expand the program’s protections for the most vulnerable, but the reductions in benefits would undermine measures to improve benefit levels. The commission relied too heavily on benefit cuts and not enough on progressive revenue enhancements that could have ensured the financial security of vulnerable seniors.
The Social Security program provides vital but relatively modest benefits to workers and their families. Several recommendations in the report aim to improve benefits for those most likely to be financially insecure. These recommendations include an attempt to make the benefit formula more progressive, a basic minimum benefit designed to be more effective than the existing special minimum benefit, an enhanced elderly survivors benefit, and the continuation of survivors benefits for students through age 22. These benefit improvements are very much needed.
The report also includes several measures to restore the program’s long-term solvency. Social Security won’t have sufficient revenue from payroll and other Social Security taxes to cover full benefits for program participants after 2034. To prevent this shortfall, the commission recommended
- applying the benefit formula annually to 40 years of earnings,
- gradually increasing the maximum wage to which the payroll tax is applied from $118,500 to $195,000,
- increasing the payroll tax from 6.2 to 6.7 percent for employers and employees over 10 years,
- increasing the full retirement age from 67 to 69, and
- reducing the annual cost-of-living adjustment (COLA) by calculating the COLA using the chained Consumer Price Index (CPI) rather than the traditional CPI.
We need to restore Social Security’s long-term solvency, but program changes should preserve benefits for economically vulnerable workers.
The measure to increase benefit progressivity for low-wage workers could be eroded
Under current law, the Social Security benefit formula is applied to the average of a worker’s top 35 years of earnings, after adjusting for wage growth. The proposed reform would count 40 years of earnings and apply the formula to each year of earnings. This approach would reduce benefits for workers with shorter careers. While intended to increase the work incentive (especially for high-wage workers), low-wage workers with strenuous jobs may not be able to work longer. This measure would work against the reform to make the benefit formula more progressive.
The downsides of raising the full retirement age
A higher age requirement would mean a benefit reduction for future retirees; retired workers would receive full benefits for fewer years. Moreover, workers who claim benefits early—between ages 62 and the full retirement age—would receive a further benefit reduction. Under current law, the full benefit age is 67 for those born in or after 1960. Workers who claim retirement benefits at age 64, for example, would have their monthly benefits permanently reduced to compensate for the three additional years of benefit receipt. But under the commission’s proposal to increase the full retirement age to 69, workers claiming benefits at age 64 would face a larger reduction to compensate for receiving benefits for the additional five years.
Many low-wage workers hold physically arduous jobs and would not be able to continue working until age 69. In theory, they could apply for the Social Security Disability Insurance program, but qualifying is extremely difficult. And some groups of workers, especially low-income workers, have shorter average life expectancies, and increasing the full retirement age would shorten the period that they would receive full retirement benefits.
The new methodology for determining benefits creates an across-the-board reduction
The COLA compensates for inflation by increasing benefits. Calculating the COLA with the chained CPI, rather than the traditional CPI, is often presented as a purely technical correction. But the change would lead to an immediate, across-the-board annual benefit reduction.
Using the chained CPI would reduce the amount by which the COLA increases each year. The chained CPI does not account for some expenses experienced by the elderly such as out-of-pocket health care costs, making it less appropriate for calculating the elderly’s COLA because it underestimates their overall costs.
Workers would experience the benefit reductions before the new benefit protections
While the benefit reductions from the chained CPI would begin immediately, the more progressive benefit formula and the basic minimum benefit would be phased in starting in 2022. The proposed basic minimum benefit should substantially improve financial security for workers after they reach full retirement age. But if low-wage workers with physically demanding jobs cannot remain in the labor force until full retirement age and claim their benefits early, they may still experience poverty between ages 62 and 69. And workers with shorter life expectancies may not live long enough to receive the basic minimum benefit at all.
Clearly, restoring Social Security’s solvency requires program changes. But increasing the full retirement age and shifting to the chained CPI are particularly onerous for low-wage workers. The proposed reforms are designed to achieve approximately 50 percent of solvency through benefit cuts and 50 percent through tax increases.
An alternative is to increase the maximum taxable wage beyond the commission’s recommended $195,000. Historically, 90 percent of covered earnings were subject to the payroll tax. This share has declined to 83 percent. The recommended increase represents only 86 percent of covered earnings, so there’s room to raise the wage cap to capture 90 percent of covered earnings again. This increase would not affect workers earning less than $118,500, because they are already paying tax on all their wages. If the wage cap were increased to cover 90 percent of wages, there would be much less need to raise the full retirement age or shift to the chained CPI in the COLA calculations—and economically vulnerable workers’ financial security would be more certain.