Use a Scalpel, Not an Ax, for Any Social Security Cuts

January 11, 2011 at 4:12 pm

Social Security benefits may be on the chopping block as policymakers tackle the nation’s long-term fiscal challenges.  But before sharpening the ax, policymakers need to keep five key facts in mind, as we explain in a new report:

  1. Social Security benefits are modest. The average benefit for the “big three” groups of recipients — retired workers, disabled workers, and aged widows — is only about $1,100 a month, or $14,000 a year.  Over 95 percent of beneficiaries get less than $2,000 a month.
  2. Most beneficiaries have little significant income from other sources. Social Security provides nearly two-thirds of income for beneficiaries 65 and older, on average, and it’s the only source of cash income for about a fifth of elderly beneficiaries.  The median household income for all elderly beneficiaries, including their Social Security benefits, is only about $20,000 a year.
  3. For most seniors, Social Security will be the only source of income that’s guaranteed to last as long as they live and to keep up with inflation. Coverage under employer-sponsored, defined-benefit pension plans — a traditional mainstay of retirement income — has fallen precipitously (see graph).  Many firms have switched to defined-contribution plans that shift the financial risks to their employees.

    As Americans try to stretch their savings in 401(k)s or other accounts (which can produce volatile and uncertain returns) to cover their full lifespan (whose length they can’t predict), preserving Social Security’s guarantee of lifetime, inflation-adjusted income will become even more important.

  4. Social Security benefits in the United States are low compared with other advanced countries. Governments around the world are feeling fiscal pressure, and some are adopting austerity programs that trim retirement benefits.  Why, some commentators ask, should the United States be different?  Here’s one reason:  most other developed countries have more generous public-pension systems than the United States.  The Organisation for Economic Cooperation and Development has tallied the percentage of past earnings that the public-pension system replaces for various workers, and for a median worker, the U.S. ranks 26th out of the 30 OECD nations.
  5. Future retirees already face a squeeze from a rising Social Security retirement age (which amounts to an across-the-board cut in benefits) and escalating Medicare premiums. Many financial planners advise their clients to aim for a retirement portfolio — from Social Security, pensions, and savings — that will replace 70 percent of their pre-retirement income.   Social Security will get them only partly toward that goal.

    For a medium worker (earning about $43,000 in 2010 dollars) who retires at age 65 today, Social Security replaces only about 37 percent of previous earnings, after subtracting Medicare premiums.  And that figure will slip as the program’s age for full benefits (sometimes called the “normal retirement age”), which climbed from 65 to 66 in the past decade, rises further to 67 for people born in 1960 and later and Medicare premiums take a bigger bite.  By 2030, that retiree’s check will replace just 32 percent of past earnings, after subtracting Medicare premiums.

All of those facts argue for limiting any cuts in future benefits — a position that the majority of the public appear to support.

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More About Kathy Ruffing

Kathy Ruffing

Kathy Ruffing is a Senior Fellow at the Center on Budget and Policy Priorities, specializing in federal budget issues.

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7 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. Jason Looney #

    There are a few things I’ve never understood in regards to Social Security.

    Why doesn’t SSI have a COLA that automatically adjusts for inflation?

    Why does the government tax some SSI benefits and isn’t that inefficient?

    • 2

      This question seems to confuse Social Security with Supplemental Security Income (SSI), a needs-tested program that’s also run by the Social Security Administration. SSI, unlike Social Security, is restricted to elderly or disabled people with low income and few assets; its benefits are capped at $674 a month, about three-fourths of the poverty level; and it’s not funded from the payroll tax. Learn more here (

      Social Security pays an automatic cost-of-living adjustment (COLA) that keeps up with inflation. That’s what we meant when we said that “[f]or most seniors, Social Security is the only income they will receive that is guaranteed to last as long as they live and to provide full inflation protection.” There were no COLAs in 2010 or 2011 simply because consumer prices fell sharply ( after summer 2008.

      Social Security benefits are partially taxable if the recipient’s adjusted gross income, plus tax-exempt bond interest, plus half of Social Security benefits exceeds $25,000 (for singles) or $32,000 (for couples). That provision was enacted in 1983 and expanded in 1993; the proceeds are deposited in the Social Security and Medicare trust funds. The Congressional Budget Office estimates that about three-quarters of Social Security benefits are exempt from income tax because their recipients fall below those thresholds.

  2. Pong Ping #

    Not mentioned at all is the fact of people coming into the USA; legal or illegal rec SS benefits w/o congributing a cent to it. this should STOP immediately as its one of the biggest drains on social security.

    • Nick #

      Actually immigrants do pay taxes. From an AP article:

      “Illegal immigrants are paying taxes to Uncle Sam, experts agree. Just how much they pay is hard to determine because the federal government doesn’t fully tally it. But the latest figures available indicate it will amount to billions of dollars in federal income, Social Security and Medicare taxes this year. One rough estimate puts the amount of Social Security taxes alone at around $9 billion per year.”

    • 5

      We addressed this misconception in a paper Paul Van de Water wrote in 2008, which states: “The presence of unauthorized (undocumented) workers in the United States also has a positive effect on the financial status of Social Security. The earnings of unauthorized workers are less likely to be reported for tax purposes than the earnings of the rest of the population and even less likely to result in future benefits, according to Social Security’s chief actuary. Although the magnitudes cannot be precisely determined, the actuary has estimated that unauthorized immigrants paid as much as $13 billion in Social Security payroll taxes in 2007….[U]ndocumented workers are unlikely to receive Social Security benefits based on the wages they earned while undocumented, even if they and their employers paid Social Security payroll taxes.”

  3. Beverly Fitzgerald #

    Not mentioned but implied is the fact that SS benefits are the most stimulative government program (perhaps tied with food stamps) that exists and provides a bigger boost to the economy in the short term than credits for businesses. Recipients alo pay income tax on 85% of those benefits in many cases while businesses find plenty of loopholes to reduce or eliminate their tax obligation.

  4. Joe Kennedy #

    All good points, but one other factor not often mentioned, but perhaps even more important, is that from the perspective of the future SSO recipients taken as a group, the benefits they are scheduled to receive have been (more than) fully funded by their contributions during their working lives (as graphically displayed in the CBO’s supplemental schedules to their long-term analysis issued in September 2010).

    In other words, SSO can be seen as a defined benefit plan sponsored by the govt., but funded (fully vis a vis benefit received) by the employees. People are in fact “saving” (reducing current consumption) by over 12% of earnings so they will have this benefit in the future. So if it really is necessary to cut the deficit/public debt level by “taxing” people’s retirement savings, fine, but tax all of it equally! SSO, DB & DC plans, deferred comp, Roth’s Ira’s, and all other net financial assets. Now that would be both bold and fair!

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