At the Cato Institute, Romina Boccia explains how increasing Social Security benefits, pushed by inflation and excess benefits, are putting the system at risk. She writes:
Here’s an unpopular opinion: Social Security benefits are growing too fast. And this excessive benefit growth is one of the key reasons the program is unsustainable.
We’ve all heard that entitlement programs are suffering under the weight of a demographic shift. The American population is aging and living longer, as fertility has declined. Fewer new workers as the share of the senior population increases means fewer taxpayers available to cover the cost of old‐age benefits.
This is true. And it’s also true that we could solve a lot of the entitlement spending problem, without cutting a single penny from current benefits, by slowing the growth in benefits.
In the case of Social Security, benefits are growing much faster than inflation. This is by design. And the difference is sizeable.
Prior to 1972, it took an Act of Congress to adjust Social Security benefits as they weren’t indexed to any economic measure. This meant that during periods of inflation the purchasing power of benefits would decline until Congress passed a benefit increase. Amendments in 1972 adopted the consumer price index for automatically adjusting current benefits for inflation. By 1977, Congress adopted further amendments, this time determining that initial benefits would be indexed to wage growth.
To this day, workers’initial benefit levels are indexed to wage growth and ongoing benefits adjust with price growth.
The chart below shows the growth in workers’ initial benefit amounts over a period of 25 years, adjusted for inflation (for comparison) and wage growth (which tends to grow faster than inflation).
Here’s an example to illustrate this point: When Chris (an average American wage earner) decided to claim Social Security in 2020, she began receiving $18,231 per year. Pat on the other hand, with a very similar earnings history as Chris, claimed benefits 25 years earlier, in 1995, and she receives $14,545 in 2020—Pat’s initial benefit of $8,638, adjusted for 25 years of inflation.
Why are Pat and Chris, who earned the same and contributed the same payroll taxes to Social Security over their lifetimes, receiving wildly different benefits in 2020?
That’s the power of wage indexing. When Chris applied for benefits in 2020, she didn’t receive the same benefit as Pat, adjusted for inflation. Instead, Chris benefited from a $3,686 bump‐up to reflect the increase in the standard of living, after inflation, that occurred between 1995 and 2020.
Some might argue that this is a good thing. Perhaps one of the goals of Social Security should be to raise the standard of living in retirement for average‐wage workers by giving them a boost based on wage gains that occurred since they started working. After all, an important principle embedded in Social Security’s design is to redistribute some income from higher‐earning workers to those lower on the income scale.
However, higher‐earning workers also benefit from this excess benefit adjustment. Here’s another example featuring Jordan and Riley, high‐income workers retiring 25 years apart. Jordan applied for benefits in 2020 and now collects $37,000 in annual income from the program. Riley, with the same earnings history and tax contributions collects $8,000 less, because she applied in 1995 and her benefits stayed the same, except for increasing with inflation. That doesn’t seem particularly fair but this is how the program works.
Read more here.