November 13, 2013

Mandatory SpendingOption 17

Function 650 - Social Security

Lengthen by Three Years the Computation Period for Social Security Benefits

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Outlays 0 -0.1 -0.4 -1.1 -2.2 -3.6 -5.5 -7.6 -10.0 -12.6 -3.8 -43.2

Note: This option would take effect in January 2015.

As required by law, the Social Security Administration calculates retirement benefits on the basis of a worker’s wage history, using the worker’s average indexed monthly earnings, or AIME. The current formula computes the AIME on the basis of a worker’s earnings that are subject to Social Security taxes during his or her highest 35 years of earnings. If a person has worked for fewer than 35 years, the average includes years with zero earnings.

This option would lengthen the AIME computation period to 36 years for people who turn 62 in 2015, to 37 years for people who turn 62 in 2016, and to 38 years for people who turn 62 in 2017 and beyond. Extending the computation period would generally reduce benefits by requiring that additional years of lower earnings be factored into the benefit computation. The option would not change the number of years used to compute AIME amounts for disabled workers; only retirement benefits would be affected.

The option would have the largest effect on people who worked for fewer than 38 years, because they would have additional years with no earnings included in the calculation of their benefits. However, the option would reduce benefits even for people who worked 38 years or more, because almost all of those people would have lower average earnings in the additional computation years than they would have in their highest 35 years of earnings.

Lengthening the period by three years would reduce federal outlays by $43 billion through 2023, the Congressional Budget Office estimates. By 2038, Social Security outlays would be reduced by 2 percent; when measured as a percentage of total economic output, the reduction would be 0.1 percentage point, as outlays would fall from 6.2 percent to 6.1 percent of gross domestic product.

An argument in support of expanding the computation period is based on people’s increased life expectancy: Because people generally live longer than they used to and are expected to live longer in the future, lengthening the computation period would encourage them to remain in the labor force longer. That additional work would increase total output. It would also extend the amount of time that people pay into the Social Security system, boosting federal revenues from income and payroll taxes, and it would result in higher future Social Security benefits (although the increase in benefits would be smaller than the increase in revenues). The estimates shown here for this option over the next decade do not include those effects of additional work.

Extending the computation period also would reduce the advantage currently enjoyed by workers who postpone entering the labor force—while they pursue advanced education, for instance. People with more education generally earn more than their counterparts who enter the labor force sooner; because a number of years of low or no earnings can now be ignored in calculating the AIME amount, the former group experiences little or no loss of benefits for any additional years spent not working and thus not paying Social Security taxes.

An argument against this option is that it would adversely affect some beneficiaries who were not able to continue working for 38 years because of circumstances they could not control, such as poor health. Other disproportionately affected workers would be parents who interrupted a career to raise children or workers who experienced long stretches of unemployment. On average, the benefit reduction would be larger for women than for men, because women tend to spend more years out of the workforce.