Reduce Social Security Benefits for New Beneficiaries

Social Security is the largest single program in the federal budget, providing a total of $905 billion in benefits in 2016 to retired and disabled workers, their eligible dependents, and survivors of deceased workers. The Congressional Budget Office estimates that the average monthly benefit is now $1,365 for retired workers and $1,178 for disabled workers. The benefits that people receive in the year they are first eligible for benefits—at age 62 for retired workers and five months after the onset of disability for disabled workers—are based on those workers’ average lifetime earnings. The formula used to translate average earnings into benefits is progressive; that is, the ratio of benefits to earnings is higher for people with lower average earnings than for people with higher average earnings. One way to achieve budgetary savings would be to adjust that formula to reduce benefits for all new beneficiaries.

This option includes two ways to adjust the benefit formula to reduce Social Security benefits by two amounts, 5 percent and 15 percent. Both alternatives would phase in the reductions starting with people who would be newly eligible in 2018. Under the 5 percent reduction, benefits would be permanently lowered by 2.5 percent for newly eligible beneficiaries in 2018 and by 5 percent for newly eligible beneficiaries beginning in 2019. (Benefits for newly eligible beneficiaries in 2018 would remain 2.5 percent lower throughout their lifetime.) Under the 15 percent reduction, benefits would be permanently reduced by 2.5 percent for people newly eligible in 2018, 5 percent for people newly eligible in 2019, and so on, up to 15 percent for people newly eligible beginning in 2023.

Serving as a benchmark, this option shows that policymakers might achieve substantial savings by cutting benefits for new Social Security beneficiaries only. This option would not affect current beneficiaries or those who will become eligible before 2018. CBO estimates that, between 2018 and 2026, federal outlays would be reduced by $105 billion under the 5 percent alternative and by $190 billion under the 15 percent reduction. Federal savings from those changes in the formula would continue to grow in later years as more beneficiaries were subject to the lower benefits. By 2046, Social Security outlays would be about 4 percent lower under the 5 percent benefit reduction and 12 percent lower under the 15 percent alternative than under current law, CBO estimates. When measured as a percentage of total economic output, Social Security outlays would fall from 6.3 percent to 6.0 percent of gross domestic product under the 5 percent alternative and to 5.5 percent of gross domestic product under the 15 percent reduction.

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.

One rationale against this option is that both reductions would be applied soon, leaving people approaching retirement little time to adjust to the change. A more moderate approach would reduce Social Security benefits only for people becoming eligible for benefits 5 or 10 years in the future. However, delaying the option’s start date would reduce the resulting budgetary savings. For example, if the 15 percent benefit reduction was implemented starting in 5 years (in 2022), increasing by 3 percent each year, total savings between 2017 and 2026 would amount to $40 billion.

Because benefit reductions would apply to all new beneficiaries, another disadvantage of the two alternatives in this option 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 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 relative decline in their standard of living. A more progressive approach would reduce Social Security benefits by larger percentages for people with higher benefits.

If the goal instead was to achieve the level of 10-year savings attained by the 5 percent or 15 percent alternatives by cutting benefits for all current and future beneficiaries, the required reduction would be considerably smaller: All benefits would need to be lowered by about 1 percent or about 2 percent, respectively.