November 13, 2013

Mandatory SpendingOption 18

Function 650 - Social Security

Reduce Social Security Benefits for New Beneficiaries by 15 Percent

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Outlays 0 * -1 -4 -8 -14 -23 -33 -45 -58 -13 -188

Notes: This option would take effect in January 2015.

* = between -$500 million and zero.

The Social Security benefits that people receive in the year they are first entitled to benefits—at age 62 for retired workers and 5 months after the onset of disability for disabled workers—depend on a formula set in law. When workers first claim Social Security benefits, payments are based on their average lifetime earnings. The formula used to translate average earnings into benefits is progressive; that is, the replacement rate—the ratio of benefits received to a worker’s past earnings—is higher for people with lower average earnings than for people with higher average earnings. One way to reduce benefits would be to adjust that formula to lower benefits for all new beneficiaries.

This option would adjust the benefit formula to reduce Social Security benefits for people who become eligible in calendar year 2015 or later. Benefits would be permanently reduced by 3 percent for people newly eligible in 2015, 6 percent for people newly eligible in 2016, and so on, up to 15 percent for people newly eligible in 2019 or later. Federal savings from that change in the formula would continue to grow in later years as more beneficiaries were subject to the cuts. The Congressional Budget Office estimates that federal outlays would be reduced by $188 billion through 2023. By 2038, this option would reduce Social Security outlays by about 12 percent relative to what would occur under current law; when measured as a percentage of total economic output, the reduction would be 0.7 percentage points, as outlays would fall from 6.2 percent to 5.5 percent of gross domestic product.

Only future beneficiaries would be affected, so the option would not affect payments to people who turned 62 or became entitled to disability benefits before 2015. Nor would this option affect the annual cost-of-living adjustments for current or future beneficiaries.

An advantage of this option is its simplicity. The current benefit structure would be retained, and equal percentage reductions would be applied to all benefits, including those paid to survivors and dependents, which are based on the same formula used to compute workers’ benefits.

Because the same benefit reductions would apply to all beneficiaries, a disadvantage is that people with lower benefits would generally experience a larger percentage reduction in total income. In particular, such people are less likely than others to have savings and sources of income outside of Social Security, such as pensions, so a reduction in Social Security benefits would result in a larger reduction in total income for that group and a greater decline in their standard of living. An alternative approach would reduce Social Security benefits by larger percentages for people with higher benefits.

Another disadvantage of this option is that reductions would be applied fairly soon. An alternative approach is to reduce Social Security benefits only for people becoming eligible for benefits 5 or 10 years in the future. That approach would give people more time to adjust to the change, but it would also reduce the budgetary savings over many years.