How Congress Has Already Cut Your Social Security Benefits
(Editor’s note: The following is an excerpt from a new book, “Social Security Works! Why Social Security Isn’t Going Broke and How Expanding It Will Help Us All,” published by The New Press, 2015, all rights reserved. Order a copy here.)
It’s not widely recognized, but Social Security is gradually weakening. Still the most important source of retirement income for the vast majority, Social Security benefits have been chipped away, and will be roughly 24 percent lower for workers born after 1959.
In 1983 Congress passed legislation that included significant reductions in benefits. Very importantly, the 1983 legislation raised Social Security’s full retirement age from age 65 to 67, a change that is still being phased in. The 1983 amendments set the Social Security “full retirement age” at 66, gradually phased in for those born in 1943 through 1954. It will then gradually increase to age 67, fully phased in for those born after 1959.
For those not thoroughly immersed in how Social Security benefits are calculated, increasing Social Security’s “full” retirement age may sound like just a small, reasonable adjustment for changes in life expectancy. But that is not right. Rather than a single, fixed retirement age, it is more accurate to think of Social Security as having a band of ages. Workers may claim benefits as early as age 62. For every month they delay up until age 70, benefits are increased to take into account that they will be received for one month less.
Consequently, because of the way that Social Security benefits are calculated, raising the age defined in the Social Security Act as the “retirement age” by one year is mathematically indistinguishable from about a 6.5 percent cut in retirement benefits, whether one retires at age 62, 67, 70, or any age in between. Raising the statutorily defined retirement age sounds like it should mean that if you work longer, you will eventually get what you would have gotten. But you never actually do catch up. If the definition of retirement age is changed to be an older age, you always get less than you would have without the change.
This point is complicated and not well understood, even by some experts. Because the use of the phrase “full retirement age” lends to confusion, keep in mind that the important thing to understand about retirement age increases is that for every year that Social Security’s “full retirement age” is raised, retirement benefits are cut by roughly 6.5 percent. It does not matter when someone first claims benefits—at 62 or 70, or somewhere in between. The 1983 enactment, which gradually phases in a two-year increase in the full retirement age from age 65 to age 67, has already lowered benefits by around 6.5 percent. When fully phased in, the change will cut the benefits of those born in 1960 or later by around 13 percent.
In addition to increasing the full retirement age, the 1983 legislation delayed the annual automatic cost of living adjustment by six months, from June to January. Again, it’s a bit complicated to understand without knowing the details of benefit calculations, but this delay translates into a 1.4 percent cut for everyone, now and in the future. Finally, decisions made in 1983 and 1993 to treat a growing portion of Social Security benefits as taxable income for an increasing number of retirees effectively will have lowered benefits (i.e., net after-tax benefit in- come) by 9.5 percent in about thirty-five years.
Prior to the 1983 legislation, Social Security benefits were tax-free. Since 1984, up to 50 percent of Social Security benefits have been counted as taxable income for individuals with incomes in excess of $25,000; $32,000 for couples. Since 1993, additionally, up to 85 percent of Social Security benefits have been taxed for individuals with incomes in excess of $34,000; $44,000 for couples. Because these thresholds are not adjusted for inflation, the reduction in effective benefits increases over time. The effective cut is, on average, 6 percent in 2012, 8.8 percent in 2030, and 9.5 percent in 2050.
The result of all these cuts together is that Social Security—by far the most important retirement asset that most working Americans have now and will have in the future —is on a trajectory to replace less and less pre-retirement earnings. Even so, it remains the most widespread, effective, secure, and significant source of retirement income for today’s workers and those who will follow. This is why it is so important for Social Security’s retirement protections to be expanded, especially because, as we detail in Social Security Works!, the prospects for relief from other quarters are slim to none.
(Copyright © 2014 by Nancy J. Altman and Eric R. Kingson. This excerpt originally appeared in Social Security Works! Why Social Security Isn’t Going Broke and How Expanding It Will Help Us All, published by The New Press in January 2015, and is used here with permission.)