Center for American Progress. As a result of the COVID pandemic, about 3 million retired workers who turn 60 years old in will very likely have much lower lifetime Social Security benefits than previously expected. Fortunately, there is a simple legislative change—explored in detail below—that would fix these problems without lowering the benefits of any other cohort of retirees. Chairman of the U. The initial retirement benefits that Social Security beneficiaries receive in the first year of retirement are determined by a formula that depends, in part, on the growth of average wages in the economy.
Due to the economic fallout from the COVID pandemic, the key measure of average wages—the average wage index AWI —is very likely to decline in As a result, the initial retirement benefits for those who are first eligible to receive benefits in —when they reach the age of 62—would be significantly less than what was anticipated only months ago, before the pandemic began to exact its economic toll.
The effect is very likely to be so significant that workers turning 62 in would receive initial retirement benefits that are less than those of workers who were born a year earlier and who had essentially the same earnings history.
This incongruity is what Social Security experts call a benefit notch. Such a notch would be unfair to the beneficiaries who turn 60 in and first become eligible to retire in because benefits are normally expected to grow for each successive cohort of retirees.
And some retirees receive benefits because they have children or other relatives who are dependents; these additional benefits would also be reduced. Additionally, the AWI problem would affect about 1 million individuals drawing Social Security disabled-worker benefits who become newly eligible for benefits in Their initial and lifetime benefits would be lower, as would the benefits of their spouses and dependents.
The effect on lifetime earnings could be especially large for those who become disabled at a young age, as they would receive reduced benefits for each and every subsequent year that they draw Social Security benefits. When the current Social Security formula was put in place in , no provision was made for the contingency that economic conditions would be so dire that average wages would fall in any given year. This problem first surfaced in during the Great Recession.
The AWI, however, fell by a relatively small amount, and policymakers chose not to do anything about it. There is ample precedent for fixing this problem. However, under the law, if prices fall in any year, benefits are not adjusted downward; rather, they remain the same.
The second precedent concerns the Social Security contribution and benefit base, also known as the taxable maximum. The taxable maximum is the dollar amount of annual earnings above which the Social Security payroll tax does not apply.
The same should be the case for determining initial Social Security benefit levels; they should not be allowed to decline even if the AWI declines.
To accomplish this goal, Congress must provide specifically that the AWI used for the benefit computation is not allowed to decline from one year to the next, even if the actual AWI falls. We need your help. Almost immediately, readers wrote to condemn us for overlooking what they considered a key issue. It is not expenditures on the elderly — it is a partial refund of money we have been forced to hand over.
So we took a closer look. The Urban Institute, a non-partisan research institute in Washington, produces statistics on this topic annually. Institute researchers figured out what people turning 65 in various years have already "paid in" to the system and what can expect to "take out" after they reach age See our charts below Because marital status and family income can significantly affect both the amount paid in and the amount paid out, the institute offers its calculation for various types of family units.
To make the final amounts comparable to what might have been done with the tax money had it been invested privately, the institute adjusted all dollar figures at 2 percentage points above the rate of inflation. The authors note that different assumptions for long-term returns on investment would change the results. So, this couple will be paid about one-third more in benefits than they paid in taxes. If a similar couple had retired in , they would have gotten back almost three times what they put in.
And if they had retired in , they would have gotten back more than eight times what they paid in. Some types of families did much better than average. In , this same year-old couple would have received five times more than what they paid in, while in , such a couple would have ended up with 14 times what they put in.
Such findings suggest that, even allowing for inflation and investment gains, many seniors will receive much more in benefits than what they paid in. And even so, the Social Security shortfall will be more than evened out by the extra dollars the couple gets back from Medicare. Such insurance would otherwise have to be purchased commercially. While there is technically a modest Social Security trust fund, the federal government has long paid out most Social Security revenues to beneficiaries, leaving the government and future workers with what amounts to an IOU to cover the next generation of beneficiaries.
In , the average American lived for 68 years and retirees were supported by 16 active workers. Now, the average life expectancy is 78 and just three workers support every retiree.
Promised benefits will exceed revenues by about 30 percent, and there will be no money in the trust fund to rely on. Thus, Social Security is — and always has been — a transfer system from younger generations to older generations.
In most cases, people get more from Social Security and Medicare combined than they put in, though the specific amount can vary depending on income and family circumstances. Assuming the Trustees report is spot on and the OASDI burns through its reserves by , then interest income will no longer be a contributor, and practically every cent of revenue will be generated from payroll taxes. Payroll taxes, which are officially known as FICA taxes, are paid by working Americans on their wages and earned income with the purpose of adding revenue to Social Security and Medicare Part A.
FICA taxes total Employers and employees typically split the FICA taxes right down the middle 7. The self-employed are required to cover the full When broken down a bit further, 6. The 1. Any income you earn above that is exempt from the Social Security payroll tax. This top-end figure is linked to the National Average Wage Index and adjusted annually. The one exception is if there's no cost-of-living adjustment, in which case the maximum taxable earnings figure stays the same the following year.
That 6. Specifically, as noted by the SSA, 5. Increasing what Americans pay in FICA taxes is among the more than one dozen ways that lawmakers in Washington have suggested for keeping the Social Security Trust Funds from running dry. Democrats on Capitol Hill view it as one of the simplest solutions.
Other lawmakers say that eliminating the cap altogether is the smartest solution. Doing so would mean that the rich would pay considerably more in Social Security taxes without a commensurate increase in their eventual payouts. It would, however, cover a good portion of Social Security's long-term budgetary shortfall. Another possible solution would be an across-the-board increase in payroll taxes.
The Trustees report estimated an actuarial deficit of 2.
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