A show of hands from retirees, please. How many of you would describe your Social Security benefit as “generous”?
Hmmm … not too many hands are going up, I see. That is not surprising. The average monthly benefit this year is $1,341, or $16,092 a year – just enough to stay out of poverty.
But ask this question in Washington and you can get a different answer. A political debate is raging among policy experts, economists and actuaries about the most important measure of Social Security benefit adequacy: just how much pre-retirement income is replaced. For years, Social Security’s nonpartisan professional actuaries have provided a standard answer: about 40% for average wage-earners.
But conservatives have mounted a campaign to discredit that figure, arguing that the replacement rate is actually about 60% – a dramatically higher figure that would mean most people retire comfortably.
Their campaign seemed to reach a crest in December, when the Congressional Budget Office (CBO) – which provides budget and economic information to Congress – embraced the higher numbers.
But in a remarkable turn of events, CBO retracted its analysis earlier this month when it discovered calculation errors. The agency backtracked and published revised figures very close to those of the Social Security actuaries.
The debate may sound like a tempest in a teapot, but it matters very much for retirees. Replacement rates are the central numbers measuring the adequacy of Social Security benefits, and they also inform our broader policy debate about how to encourage saving for retirement.
Most experts say that retirees need to replace 70 to 80% of their wages to retire comfortably. If Social Security actually replaces 60% of income, that suggests a much smaller saving challenge than previously thought.
Congress and the next president likely will have a debate on Social Security reform, and we will need a common, agreed-upon set of facts if we want the outcome that is best for future retirees.
The program’s two key trust funds – for retirement and disability programs – are on track to be exhausted in 2034, according to the Social Security trustees, absent an injection of new revenue, benefit cuts or some combination of the two.
Progressives hope to not only restore the trust fund’s health, but expand Social Security benefits as part of the reform debate. Already the issue is being debated on the presidential campaign trail, with Hillary Clinton and Bernie Sanders arguing for increased revenue and expanded benefits, and various GOP candidates proposing to cut benefits by boosting retirement ages or means-testing the program.
Adequacy of benefits will be central to the debate – and the CBO decision to backtrack seems to settle the dispute about the current replacement rates. So, too, should a 2014 review of various replacement methods conducted by the Social Security actuaries. It found only miniscule differences between various measurement approaches.
“I’m absolutely convinced that Social Security is not a excessively generous program. It would be impossible to summon a panel of working people who felt like they were getting just what they needed from it,” said Alicia Munnell, director of the Center for Retirement Research at Boston College (CRR). Munnell chaired a technical advisory panel last year that reviewed the program’s financial projections.
Replacement rates will fall in the years ahead, from 40% in 1985 to a projected 30% in 2030, according to CRR. The steep drop is due mainly to the higher retirement ages legislated in 1983 (from 65 to 67). That change gradually raises the bar for attaining a full retirement benefit – effectively a benefit cut. But higher Medicare premiums, which are deducted from Social Security benefits, also will contribute to lower rates.
So will a rising share of benefits subject to taxation. CBO estimates that taxes paid will rise from 6.5% of total benefits in 2014 to more than 8% by 2024, and more than 9% by 2039.
Meanwhile, just 23% of workers within earshot of retirement – those aged 45 and higher – have saved more than $250,000, according to the latest Retirement Confidence Survey of the Employee Benefit Research Institute (EBRI). Just 14% told EBRI they are confident of being able to afford long-term care expenses.
The conservative campaign on replacement rates is part of a larger argument about retirement security – namely, that there is no retirement security crisis. “Ask retirees about their standard of living, and most say it’s fine,” said Andrew Biggs, resident scholar at the American Enterprise Institute and one of the chief proponents of the higher replacement rate theory. And there is research supporting the claim that retirees have greater economic security than the working population.
From where I’m sitting, much of that security stems from Social Security, with its guarantee of lifetime income and automatic inflation adjustments. Muddying the waters with arguments that Social Security already is too generous is a sure way to damage the economic security of future retirees.