Reducing Social Security costs without reducing existing benefits

Social Security benefits are increasing too rapidly. This acceleration in benefit growth is a significant factor in the program's worsening financial situation.

We've all heard about the challenges facing programs due to a changing demographic landscape. The U.S. population is aging and living longer while birth rates are declining. This means fewer new workers contributing taxes to support benefits for the growing number of retirees. This predicament is real, but there's a solution that doesn't require cutting existing benefits.

We can slow the growth of benefits.

Before 1972, adjusting Social Security benefits required an act of Congress because they weren't tied to any economic measure. When inflation occurred, it would erode the purchasing power of benefits until Congress acted. In 1972, the system shifted to using the Consumer Price Index for automatic inflation adjustments. Further changes in 1977 linked initial benefits to wage growth. Today, workers' initial benefit levels are tied to wage growth, while benefits adjust with price growth.

The cost growth issue arises because new benefits rise substantially faster than inflation.

Consider Chris and Pat, who earned and contributed equally to Social Security. In 2020, Chris received $18,231 annually, while Pat, who claimed benefits 25 years earlier, got $14,545 in 2020. Pat's initial benefit, first claimed in 1995, was adjusted for inflation. The discrepancy arises from wage indexing, which essentially updates Chris's total earnings history as if all her wages were earned in 2018 (two years before she claimed benefits) instead of the actual wages that Chris earned.

Some argue this boosts the standard of living for otherwise poor retirees. Yet, even higher-income earners benefit.

Take Jordan and Riley, retiring 25 years apart. Jordan, who applied in 2020, receives $37,000 annually, while Riley, who applied in 1995, gets $8,000 less. Both have the same earnings history yet receive wildly different benefits based on when they first claimed benefits.

Wage indexing raises retirees' benefits by giving them retroactive credit for improvements in the economy — whether their wages or tax contributions reflect those improvements or not. Changing the initial benefit formula to preserve the current generosity of benefits would mean adjusting workers' earnings history for inflation rather than for economy-wide wage growth. This would make Social Security more financially sound.

According to the Social Security Trustees, shifting to inflation-based benefit calculations could close the program's funding gap, even leading to long-term surpluses. Congress may only wish to adopt this formula for the highest 70 percent of earners — so-called progressive price indexing — preserving the current wage growth boost for lower-income seniors while curbing benefit growth for most.

Even this approach would nearly achieve 75-year solvency, closing the funding gap by 95 percent. Critics may worry about the effect on seniors, but the data show that senior households have seen income grow substantially over the years, including under a hypothetical scenario where initial benefits had been price indexed.

Shifting to price indexing, especially for higher earners, makes sense to secure Social Security's future without necessitating tax hikes or cuts to existing benefits. There's a way for the United States to honor its promise to seniors, to keep them out of poverty in old age without breaking the bank. Now, we need politicians to muster the political will to slow the ever-increasing generosity of Social Security benefits so they are sustainable over the long term.