Social Security benefit cuts are gathering political attention again. Increases in the age for receiving full retirement benefits are a specific cut that a large number of members of Congress have proposed. Congress will indeed adjust Social Security’s finances in the coming years to make sure the program can pay all of its promised benefits. Starting those adjustments with benefit cuts, especially regressive ones such as increasing the retirement age that hurt lower-income earners more than higher-income earners, is exactly the wrong approach, however. Raising additional revenues from high-income earners should be a preferred policy approach that strengthens rather than weakens the program.
Social Security’s finances are generally solid. According to the latest report from its trustees, the program can pay all promised benefits without changes to Social Security until 2033. Benefit payments will exceed total income starting in 2034. Payroll tax income will then cover 80% of promised benefits, meaning that beneficiaries would receive benefit cuts of 20% in 2034 and beyond. Payroll taxes would need to immediately rise by 3.44 percentage points to 15.85% to cover the expected long-term shortfall. Importantly, the costs of the program do not outpace the economy in the future. According to the Social Security trustees, Social Security will cost 5.95% of gross domestic product (GDP) in 2034, the first year when total income falls short of promised benefits, and 5.99% in 2100. The bottom line is that Social Security can pay for the overwhelming majority of promised benefits without any changes. And those changes, while necessary, are manageable, especially since they don’t grow uncontrollably in the future.
Congress can either raise revenues for Social Security, cut benefits, or enact a combination of more revenue and lower benefits to realign the program’s income and benefit payments. Social Security provides universal, basic benefits when the main source of income – earnings – disappears due to the death, disability, or retirement of the main earner. That is, there is little room to cut benefits without severely hampering the financial security of tens of millions of Americans.
The program numbers tell the tale of a broadly necessary but very basic social insurance program. In total, 66 million people received Social Security benefits in 2023. Those included 51.3 million who got retirement benefits, another 8.8 million with disability benefits, and 5.9 million with survivorship benefits. The total includes 3.8 million children who receive Social Security benefits. At the same time, the average monthly benefit amounted to a modest $1,688 in 2023. Millions of people rely on Social Security to provide at least basic financial security. Cuts to these benefits would sharply reduce financial security for a broad swath of people.
Increasing the retirement age would be such a cut. Under typical proposals, including the one made by the Republican Study Committee, which includes most Republican members of the House of Representatives, the full retirement age would increase, though this particular proposal was short on details. Typically under such proposals, people could still apply and get early retirement benefits at age 62, but their benefits would be permanently reduced. That reduction increases as the full retirement age goes up. Currently, the full retirement age is 67, and somebody retiring at age 62 would receive 30% of the benefit that they would have gotten if they had retired at 67 years. Raising the retirement age beyond age 67 would further deepen this cut.
A higher retirement age is also highly regressive. This is a one-size-fits-all cut. Raising the full retirement age by one year means that everybody has to wait for one more year to get their full benefit. But that delay makes up a much larger share of the remaining life expectancy for some population groups than for others. For instance, African-Americans and Latinos, but also those without a college degree, have much lower life expectancies than white workers and those with a college degree. Put differently, Black and Latino workers, but also workers without a college degree, would experience a much larger reduction in their total retirement income than their counterparts would.
In some cases, this inequality is actually getting worse. Data from Princeton economists Anne Case and Angus Deaton, for example, show that the life expectancy of those with a college degree continues to go up, while that of people without a college degree has been falling for decades. Similarly, life expectancy is growing more slowly or even declining in rural areas while it is going up in urban areas. A higher retirement age then puts people without a college degree, who are often struggling with low retirement savings and poor health in their early sixties, in a bind. They can keep on working longer in declining health or retirement with ever smaller retirement benefits. Raising the retirement age puts retirement security increasingly out of reach for those who are most likely to need Social Security.
The main argument in favor of raising the retirement age – that people live longer and thus should work longer – then falls apart under closer scrutiny. As stated before, life expectancy is falling for some groups. Changes in life expectancy also have little to do with people’s ability to work longer. One is the result of medical advances that address health issues at a very old age. That says nothing about whether people can work longer in the early to mid-60s. People can suffer from chronic health issues such as a bad back, carpal tunnel syndrome, as well as vision and hearing loss that can prevent them from doing their job but that do not substantially reduce their life expectancy.
Policymakers in Congress will need to address Social Security’s expected long-term financial shortfall. One option would be to make the system more progressive by raising more revenue from higher-income earners. This could include lifting or substantial increasing the cap, above which earnings are no longer subject to Social Security taxes. This could also include taxing parts of income that are currently excluded from taxation such as people’s contributions to so-called cafeteria benefits – parking benefits, flexible spending accounts and the likes. Increasing the retirement age is the wrong way to doing that. Benefit cuts, in general, should be a last resort, but that holds especially true for regressive benefit cuts like this one.
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