On June 3, 2023, President Biden signed into law the Fiscal Responsibility Act of 2023 which, among many other provisions, raised the statutory debt limit through January 2025. The federal debt limit is a statutory cap on the amount of debt the government may incur. [For more information on the debt limit, see Raising the Debt Limit: Impact on Social Security and Medicare] Some members of Congress have expressed their unwillingness to avert the global financial crisis that would result from the U.S. defaulting on its debt obligations for the first time in history without major cuts in federal spending. Although Social Security has not contributed to the federal debt, and in fact lent its surpluses to the general fund of the Treasury from 1984 through 2021, the looming debt crisis has motivated some to argue that cuts to Social Security need to be part of any debt limit conversation.
Press reports of various groups of members of Congress working on Social Security proposals include a bipartisan group led by Senators Bill Cassidy (R-LA) and Angus King (I-ME), along with a dozen other Senators. The two Senators have confirmed they are working on Social Security legislation, though they have been unwilling to share any details of their proposal with the public, except to confirm it may include the creation of a so-called “sovereign wealth fund” to help extend Social Security’s solvency. The National Committee does not have details on the Cassidy-King proposal. However, both the concept of such an investment fund and the deep benefit cuts that are inevitable in any such scheme will be painful for America’s workers and their families. We therefore believe any members of Congress who may be considering lending their support to this proposal need to fully understand two points: first, the so-called “sovereign wealth fund” is an illusion – a smokescreen to promote a deal that is “too good to be true”. Second, the benefit cuts that lurk beneath this plan do not make Social Security “more progressive” through only trimming benefits for wealthy individuals who don’t need Social Security. Instead, workers who represent the heart of the middle class, along with some of the most vulnerable among us, will bear the brunt of any cuts.
Borrowing money to play the stock market
The Cassidy-King proposal would have the federal government borrow $1.5 trillion to invest in stocks, real estate and other risky, high-yield financial products. The funds would be given some time to grow, but eventually would need to accumulate enough earnings to pay back the loans, with interest, and still generate enough profits to shore up Social Security’s Trust Funds. The theory behind the investment fund is that, historically, stocks have outperformed bonds and markets have recovered quickly from periodic downturns. Therefore, the argument goes, relying on continued growth in the future would be a safe and pain-free way for Social Security to raise revenue. This scheme immediately raises the seeming contradiction between a Congress supposedly concerned about our current federal debt of $34.7 trillion while at the same time committing to borrow an additional $1.5 trillion to gamble on a constantly rising stock market. One might logically ask: if this scheme is such a great idea for Social Security, why not fund the entire federal government in this manner? Or if scale is an issue, why not create a similar fund to replace the taxes that fund our military? Or veteran’s health programs?
The reason no one is considering such a dramatic change in how our nation raises funds to pay for important programs is because it is a risky gamble. Although it is true that over time markets can produce higher rates of return than Treasury bonds, the amount of time it has taken the markets to recover from downturns in the past has stretched as long as thirty years. Some of those who have confidence the market will always out-perform bonds tend to have a myopic view of history, and further to believe that recent experience is a reliable indicator of future performance. Members of the National Committee, many of whom are intimately familiar with the decades of economic fallout from the Great Depression, are not so easily fooled into believing in the fantasy of a stock market “free lunch”. Because so many seniors are highly dependent on their earned benefits to pay their bills, they are unwilling to risk their monthly checks on the mirage of a Wall Street paved with gold. More than half of seniors receive over one-half of their income from Social Security, and it provides at least 90 percent of income for more than one-in-five seniors. Without Social Security, almost 40 percent of American seniors would live in poverty. It is simply not an option for them to stop paying their bills for twenty or thirty years while waiting for a bear market to recover.
The chart below shows the Dow Jones Industrial Average (DJIA) stock market index for the past 100 years with the data adjusted for inflation. The first market peak shown was in 1929. During and immediately after the Great Depression the Dow, adjusted for inflation, declined dramatically to less than one quarter of its peak value. It took 30 years, until 1959, for the market to recover to its 1929 inflation-adjusted level. Market optimists dismiss the Great Depression as an aberration, claiming changes were made in law that assure such a market drop would not be repeated.
Dow Jones 100 year historical chart.
Despite these assertions, the Dow experienced a similar long-term decline much more recently. Beginning in 1966 and lasting until 1982, the market declined to 23 percent of its peak inflation-adjusted level. The Dow did not recover to its 1966 level until 1995 – a full 29 years later. It even took six years for the market to recover from the relatively shallow decline it experienced in the recession of 2007-2008.
Overall, the large gains preceding major falls have lasted around 15 years. The current bull market has already lasted over 10 years, so if one bases expectations on past performance, another major decline could easily occur within the coming decade. If the historical record is any guide, it could take decades to recover from such a drop. According to the most recent Social Security Trustees Report, the combined Old Age, Survivors and Disability Insurance (OASDI) Trust Funds will remain able to pay full benefits until 2035 – or 11 years into the future. After that time, payroll taxes are projected to be sufficient to cover 83 percent of benefits, declining to 73 percent in 2098, leaving a gap of 17-27 percent that must be filled. The Cassidy-King plan to invest in the market could not confidently rely on stock market growth sufficient to pay back the amount borrowed, plus interest, and cover the annual gap in Social Security’s finances after only eleven years of investment. No amount of ‘wishful thinking’ can disguise the risk all Americans would face if the programs’ solvency depends on this ‘magic money’.
The Benefit Cuts No One Wants to Name
The Cassidy-King proposal is intended to extend the solvency of the Social Security Trust Funds well into the future. As has been noted above, however, the investment fund standing alone cannot be relied upon to produce sufficient profits quickly enough to solve the problem of the 17 percent gap projected from 2035 and growing to 27 percent by 2098. It is inevitable that during the first two or three decades of this scheme the shortfall in Social Security will need to be filled by cutting benefits, or by passing legislation that would authorize the federal government to borrow enough money to cover the gap. Expecting the federal government to borrow sufficient money to pay benefits, while at the same time borrowing $1.5 trillion to fund the ‘sovereign wealth fund’ – all in the face of existing debt of nearly $35 trillion is unrealistic. Although the National Committee does not have information on the specific benefit cuts potentially contemplated by the Cassidy-King plan, there are numerous proposals by conservative think-tanks which would likely be part of the mix. This witches’ brew of bad ideas for cutting Social Security seem to resurface periodically, like a bad penny, and we feel it is essential to remind American families how deeply their earned benefits would be slashed if similar proposals were adopted.
Raising the Retirement Age
Proponents of raising the retirement age argue that people are living longer and can therefore continue working for more years. While it is true that some people are living longer, this is by no means true of everyone. It is also not true that everyone can continue working until they reach age 70 even if they want to work; many are unable to continue working due to health issues or employer unwillingness to hire or retain older workers. The first issue to consider, however, is that raising Social Security’s retirement age is the wrong solution to the problem. According to the Social Security Trustees Report for 2024, confirmed by Social Security’s Chief Actuary, the imbalance between workers and retirees in the U.S. is not primarily caused by people living longer but by our constantly declining birthrate. This problem cannot be solved by forcing workers to continue working because their Social Security benefits have been slashed.
Raising Social Security’s retirement age is a benefit cut for all workers affected by the increase, no matter when they retire. This consequence of raising the age is not well understood, and many believe it only affects those who retire early. In fact, everyone in the affected birth years receives a benefit cut, no matter when they retire. Under current law, Social Security’s benefits are first calculated based on a worker’s “full retirement age” (FRA), that is, the first year in which a retired worker can receive unreduced benefits. However, a worker can claim retirement benefits as early as age 62 (the early eligibility age EEA) or can delay claiming benefits beyond the full retirement age. Workers who claim benefits before their FRA are subject to a permanent reduction in their benefits of about 7 percent for each year they claimed benefits early, to take into account the longer period of time they would be expected to receive benefits based on life expectancy (also called an actuarial reduction). Workers who claim benefits after their FRA receive delayed retirement credits that result in a permanent increase in their monthly benefits of 8 percent for each additional year worked, to take into account the shorter amount of time they would be expected to receive benefits. The delayed credits only apply up to the age of 70. Claiming benefits after attaining age 70 does not result in any further increase in monthly benefits.
As an example of how raising the age affects everyone, consider a worker born in 1990. Under current law, the FRA for this worker is age 67. If the worker retires at age 67, he would receive his full benefit amount. On the other hand, if the worker claims benefits a year earlier, at age 66, he would receive a permanent reduction in benefits of about 7 percent. Conversely, if he claims benefits a year later, at age 68, his benefits would be permanently increased by 8 percent. In comparison, consider a second worker also born in 1990 who has a full retirement age not of 67 but of 68, as the result of a change in the law increasing the retirement age. If this worker claims benefits at age 67, she will face a permanent reduction in benefits of about 7 percent, and if she were to retire at age 66 like her coworker, her benefits would be permanently reduced by about 14 percent. On the other hand if she retires at age 68, she does not receive a credit but only her normal retirement benefit – effectively costing her an 8 percent permanent increase in benefits. She would need to work a full additional year – until age 69 – to receive the 8 percent delayed credit her coworker received a year earlier.
Proponents of increasing the retirement age argue that people are living longer, and, therefore, can continue working for more years. It is unclear, however, to what extent this assumption is true or, if it is, how much higher life expectancy might rise. For example, according to the Social Security Trustees, United States life expectancy at birth for 2023 is estimated to be 75.7 years for men and 80.8 years for women, both numbers lower than comparable estimates in 2010-2019. In addition to COVID-19, other factors such as increased obesity, and drug and alcohol-related deaths have contributed to this trend.
In addition, life expectancy varies significantly by race and wealth. In the United States, Whites tend to live longer, on average, than Blacks although the longevity gap, as calculated at birth, has decreased over time. This is also true of Hispanic Americans, and non-Hispanic Asian Americans. In addition, researchers have long documented that life expectancy is lower for individuals with lower socioeconomic status (SES) compared with individuals with higher SES. Studies analyzed by the Congressional Research Service provide evidence that this gap has widened in recent decades. For example, a 2015 study by the National Academy of Sciences (NAS) found that for men born in 1930, individuals in the highest income quintile (top 20 percent) could expect to live 5.1 years longer at age 50 than men in the lowest income quintile. The analysis also found that this gap has increased significantly over time. Among men born in 1960, those in the top income quintile could expect to live 12.7 years longer at age 50 than men in the bottom income quintile. This NAS study finds similar patterns for women: the life expectancy gap at age 50 between the bottom and top income quintiles of women expanded from 3.9 years for those born in 1930 to 13.6 years for those born in 1960. This is not surprising considering higher income workers are less likely to have physically demanding jobs and more likely to be covered by high-quality employer-sponsored health insurance. [For more information on raising the retirement age, see Raising the Social Security Retirement Age: A Cut in Benefits for All Future Retirees.
The disproportionate impact of raising the retirement age has been acknowledged even by proponents of the idea, but their solutions have been vague assurances that ‘some kind’ of program will be designed to protect those who truly cannot work until age 70. In fact, we already have a program designed to accomplish exactly this goal – Social Security’s disability program. As part of their Federal Insurance Contribution Act (FICA) contribution with every paycheck, workers are earning a benefit intended to protect their families in case of the loss of income as a result of retirement, disability or death. The disability program was intended to provide a benefit for those whose physical impairments prevent them from working, without perversely creating an incentive for those who could work to stop doing so. These conflicting objectives, along with decades of underfunding the Social Security Administration’s operations, have resulted in a dramatic growth in disability backlogs where delays have become legion. Applicants have been forced to wait a year or more for hearings to determine eligibility for Social Security disability benefits, and nearly 110,000 Americans have died while waiting for a hearing. Expecting this already overburdened system to handle potentially millions of new claimants or creating an entirely new program that does not suffer from the same conflicting goals is unrealistic and a disservice to the millions of disabled American workers who would be caught up in the endless red tape that would result. [For more information on this topic, see Social Security Disability and the Debate over Raising the Retirement Age]
Making Social Security “more progressive”
A number of proposals have been offered over the years purporting to make Social Security “even more progressive”. Unfortunately, progressivity taken to its extreme would convert Social Security from an earned benefit into a welfare program, leaving it ripe for further reductions in the future – a fate which many current welfare programs have experienced. One of the most persistent of these proposals would change the way in which benefits are calculated through manipulation of the program’s “bend points”.
All Social Security benefits are based on a worker’s lifetime earnings, known as their Average Indexed Monthly Earnings (AIME). The program is progressive in that, while benefits are larger in dollar terms for higher earners, they represent a larger percentage of previous earnings for lower earners. The logic behind this is the expectation that lower earners would be less likely to have earned enough over their lifetimes to have any significant retirement savings. Lower earners are less likely to have access to retirement plans (such as 401(k) plans) through their employers, are more likely to have intermittent work histories and are more likely to be struggling just to pay their day-to-day bills, especially considering the stagnant wages of recent decades, making it difficult to also save for retirement. Today’s younger workers also are burdened with historically high levels of student debt, which has made it difficult for them to purchase homes or save for retirement.
Social Security’s Primary Insurance Amount (PIA) is the benefit workers receive when they claim benefits at their Full Retirement Age (FRA). It is calculated by applying three different percentages to the workers past earnings. All workers receive a benefit equal to 90 percent of the first dollars earned, with lower percentages of 32 and 15 percent applied to increasingly higher levels of earnings (thresholds known as “bend points”). The exact dollar amounts vary each year as they are adjusted for inflation. The overall impact is that workers with lower lifetime earnings have a higher ‘replacement ratio’ in retirement than higher earners, that is, their retirement benefits represent a higher percentage of their lifetime earnings while working. This occurs because, in the case of lower lifetime earners, all or most of their wages fall into the first bend point where their wages are replaced at the 90 percent rate. Higher earners see their lifetime wages subject to a decreasing blend of percentage rates as they go up the income scale.
Despite the smaller replacement ratio, however, there is still a strong link between earnings, and their associated FICA contributions, and Social Security’s benefits. The dollar amount of benefits for higher earners is larger than that of lower earners, and reflects the higher contributions they have made over their lifetimes. Proposals to change the formula for calculating benefits either by lowering the applicable bend point percentages, creating new, lower bend points, or changing the dollar thresholds upon which they apply all have the same fatal flaw: they weaken the link between earnings and benefits by sharply cutting the benefits of workers with above-average lifetime earnings. Over time, most workers would end up receiving very similar levels of benefits, despite having paid much higher amounts in payroll taxes over their lifetimes. Today’s earned benefit program would look more like a flat-dollar welfare benefit. And the cuts would affect not only high income workers but those whose average lifetime incomes begin around $40,000 depending upon the proposals’ details; in other words, the heart of the middle class.
It should also be emphasized that this is a very different outcome than legislation proposed by members of Congress such as Rep. John Larson (D-CT) or Senator Bernie Sanders (I-VT). Social Security expansion bills such as theirs create a new bend point that only applies to those earning at least $250,000 or $400,000 annually, depending on the proposal; their bills do not change the existing formula by lowering any current bend points.
Switching to a “mini-PIA” to calculate benefits
Currently, Social Security’s benefits are based on a worker’s average earnings over their working career. This system minimizes the penalty to workers who have periods outside the workforce. While it is not a perfect system, as it has no way to take into account workers who may have other non-covered income during these stretches (for example teachers who may work in school systems not covered by Social Security), it does help low lifetime earners who are more likely to have periods of unemployment.
A mechanism for cutting benefits that has been promoted over the years as a way of addressing this feature of Social Security’s benefit formula would change the system from one basing benefits on career average income to one which would calculate income each year separately and then average the results together. Although this may sound like a change that would make no difference to workers in the real world, in fact it disproportionately cuts benefits for workers who have intermittent work histories. Workers with low lifetime earnings tend to have these irregular earnings histories in part because they have less education and skills, are often the first fired when the economy weakens and the last hired back when it strengthens, and include many low-wage female workers who spent years out of the workforce raising children.
Such a proposal also cuts benefits for struggling workers with employment gaps due to unemployment, as well as anyone who may have worked steadily over the years but had uneven earnings. Workers who are self-employed often have uneven earnings histories, which would make this proposal especially harmful to younger workers in today’s gig economy. The impact seems arbitrary: using the “mini-PIA” to calculate benefits would result in a worker with earnings that fluctuated between $20,000 and $80,000 per year receiving significantly lower Social Security benefits in retirement than a similar worker whose income remained steady at $50,000 throughout their careers, even though their overall lifetime earnings would be the same.
In the past, some proponents of the “mini-PIA” have suggested providing ‘caregiver credits’ to those whose intermittent work histories result from caregiving responsibilities. It is difficult to tell whether such a proposal would truly compensate for the impact of the “mini-PIA” without seeing the details, but what is clear is caregiving credits do nothing to alleviate the harsh impact of the switch in formula upon workers who have intermittent earnings histories that have not resulted from caregiving. There is also a cautionary lesson to be learned from previous proposals to protect the most vulnerable from a wide variety of benefit cuts whether they be minimum benefit floors, benefit “bumps” for the oldest beneficiaries, or caregiver or other credits: such proposals are often poorly designed, apply to few workers, and fail to compensate for the harsh cuts that would result if the benefit changes became law. They are, after all, designed to shrink Social Security by cutting benefits, not to expand the program.
It should also be noted, for those representing teachers, firefighters, federal and state employees and other workers who have been harshly impacted by the Government Pension Offset (GPO) or the Windfall Elimination Provision (WEP), converting to a “mini-PIA” essentially eliminates the disproportionate impact of those provisions, but it does not accomplish this goal by raising benefits for those subject to these provisions. Instead, it closes the gap by simply lowering all other workers’ benefits. [For more information on these provisions, see Government Pension Offset and Windfall Elimination Provision]
Conclusion
Although details of the Cassidy-King proposal for Social Security have not been made public, we at the National Committee are very concerned that the appeal of “magic money” from a constantly rising stock market combined with characterizations that the benefit changes are not “cuts” but merely ways of making Social Security “even more progressive” might tempt members of Congress to endorse the proposal prematurely, before the public can fully understand the harsh reality of its impacts. Stated simply: there is no free lunch. Borrowing money to bet on the stock market is no way to fund benefits that millions of American workers rely on when they can no longer work. While Social Security does have a funding gap that needs to be addressed, proposals such as Cassidy-King accomplish that goal not by raising the revenue dedicated to the program, but by deep cuts and a “wish and a prayer” that Wall Street will fill the gap. Members of Congress should not be fooled into supporting such a scheme. The American public certainly won’t be.
SOURCES
SSA Trustees Report 2024 – https://www.ncpssm.org/documents/social-security-policy-papers/viewpoint-analysis-of-the-2024-social-security-trustees-report/
SSA Overview of benefit calculations – https://www.ssa.gov/oact/cola/Benefits.html#aime
SSA on bend points – https://www.ssa.gov/oact/cola/piaformula.html
SSA on mini PIA – https://www.ssa.gov/oact/solvency/provisions/benefitlevel.html
Report from the Bowles-Simpson Commission – https://www.ssa.gov/history/reports/ObamaFiscal/TheMomentofTruth12_1_2010.pdf
Center on Budget and Policy Priorities (CBPP) Analysis of Bowles-Simpson Social Security provisions – https://www.cbpp.org/research/bowles-simpson-social-security-proposal-not-a-good-starting-point-for-reforms
Bipartisan Policy Center (BPC): Social Security Benefit Formula – https://bipartisanpolicy.org/explainer/social-security-benefit-formula/
Urban Institute: Preparing for Retirement Reforms – https://www.urban.org/sites/default/files/publication/104874/preparing-for-retirement-reforms.pdf
Economic Policy Institute: a Social Security plan Scrooge would Love – https://www.epi.org/blog/a-social-security-plan-scrooge-would-love/
Brookings Institute – Gary Burtless – What growing life expectancy gaps mean for the promise of Social Security https://www.brookings.edu/research/what-growing-life-expectancy-gaps-mean-for-the-promise-of-social-security/
Congressional Research Service: The Growing Gap in Life Expectancy by Income: Recent Evidence and Implications for the Social Security Retirement Age https://crsreports.congress.gov/product/pdf/R/R44846/6
Congressional Research Service: The Social Security Retirement Age: An Overview https://crsreports.congress.gov/product/pdf/IF/IF12323
Government Relations and Policy, June 2024