Your Social Security benefits were cut – here’s why you didn’t notice
Cutting Social Security benefits is widely (and rightly!) seen as a third rail of American politics. But Dean Baker of the Center for Economic and Policy Research points out that two relatively recent administrative changes have done just that. How?
[The first reduction] takes the form of an increase in the age at which workers can receive their full benefits. This had been age 65 for workers who reached age 62 before 2003.
The age for full benefits then rose gradually to age 66 for workers who reached age 62 after 2008. It remained at this age until 2017, at which point it again began to increase, reaching 67 for workers who turn 62 after 2022. This increase in the age for full benefits amounts to roughly a 12 percent reduction in the value of a worker’s Social Security.
The next reduction is the result of changes to how inflation was measured by the Consumer Price Index (CPI), lowering it by roughly half a percentage point each year:
This means that if the old CPI would show a 2.5 percent rate of inflation this year, the new CPI would show a 2.0 percent rate of inflation. Accordingly, retirees’ benefits will go up a 0.5 percentage point less this year because of the differences in the CPI.
While this may seem trivial, it adds up over time. If a typical person can expect 20 years of retirement, by the end of this period, their benefits will be roughly 10 percent lower because of the changes in the CPI.
Baker notes that changing the basic formula for calculating benefits — which would involve minimal administration work — would help make up for these cuts, and improve economic security for millions of people who earn (or once earned) moderate wages:
As it stands, workers get 90 percent of the first $10,700 of their average pay. They get 32 percent of the next $50,100, and 15 percent of their average wage above this amount up to the maximum. If the formula were changed to give workers 100 percent of the first $10,700 of their average pay it would amount to an 11 percent increase in benefits for workers whose lifetime earnings put them at or below this threshold.
There are other changes to Social Security that we should be considering, such as increasing the benefit for surviving spouses. We should also look to build on the actions of more progressive states in developing government-sponsored pension plans that avoid the high fees that the financial industry charges 401(k) and IRA accounts. But, changing the payback formula for moderate wage earners is an important first step that Congress should be debating.
Full story: Center for Economic and Policy Research