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Measuring Changes to Social Security Benefits 1 (December 2003)

handle is hein.congrec/cbo10167 and id is 1 raw text is: A series ofissue summaries from the Congressional Budget Office No. 11, DECEMBER 1,2003 Measuring Changes to Social Security Benefits A number of recent proposals to reform Social Security call for changes in the program's benefits. The effects of those proposals are frequently illustrated by comparing the new benefits to those expected to arise under the policies put in place by current law-showing whether they would be higher or lower and by how much. How- ever, because of scheduled changes in benefit rules, a growing economy, and improvements in life expec- tancy, the benefits prescribed under current law do not represent a stable baseline. Their value will vary signifi- cantly across future age cohorts. Thus, focusing on dif- ferences from current law will not fully portray the ef- fects of proposed benefit changes. For example, a policy to reduce benefits for future recipients by 10 percent suggests that benefits would be lower than they are to- day. However, if benefits would double under current law, a 10 percent cut would still render greater benefits for future recipients. Understanding the implications of benefit changes requires an understanding of how the value of benefits would evolve over time.' A number of different measures can be used to assess value. One is the percentage of a worker's past earnings that his or her first-year benefits represent-what pen- sion experts refer to as a replacement rate. Replacement rates for current and future retirees show how the pro- gram's role as a source of retirement income would change over time. A second measure-the value of first- year benefits adjusted for inflation-illustrates how much the purchasing power of benefits would change from one cohort to the next. A third measure-the value of expected lifetime benefits-indicates how the aggregate benefits of successive generations would com- pare one to another. Benefits under a proposed reform could be lower when measured by the extent to which they replaced earnings and by their purchasing power but could still be greater than current benefits when tal- lied over longer expected lifetimes. When presented along with estimates of how much current-law benefits would be changed, measures show- ing changes over time in replacement rates, the purchas- ing power of benefits, and aggregate lifetime benefits provide a more complete picture of how a modified So- cial Security program would contribute to the income of future retirees. Replacement Rates and the Purchasing Power of Benefits Largely as a result of modifications legislated over the years, the proportion of a worker's average career earn- ings that Social Security benefits replace has not been the same from one cohort of recipients to the next. Dur- ing the program's first decade (1940 to 1950), replace- ment rates generally fell for each cohort of new retirees.2 They rose in 1950 with a major increase in benefits and then hovered in a relatively narrow range for the next 20 years. Following a series of benefit increases and pro- gram reforms in the late 1960s and early 1970s, they rose again, reaching a historical peak in 1980 at levels more than twice as high as when the program began. Major reforms enacted in 1977 caused replacement rates to recede somewhat in the 1980s, after which they lev- eled out. Additional reforms enacted in 1983-raising the age for receiving full benefits-will cause them to 1. This brief focuses on alternative measures of changes in benefits. A discussion of the overall value of the Social Security system would consider both benefits and taxes. 2. The replacement-rate concept used here shows first-year benefits expressed as a percentage of average career earnings adjusted for wage growth in the economy up until the year before retirement.

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