• gradually changing the benefit cal- culation to reduce benefits for work- ers whose incomes are above the national average; • gradually increasing the full retire- ment age (to 68 by 2050 and 69 by 2075) and the early retirement age (to 63 by 2050 and 64 by 2075); • increasing the amount of wages sub- ject to the Social Security payroll tax; • adding a 5-percent benefit “bump up” for those who have received So- cial Security benefits for at least 20 years and are at risk of outliving their retirement savings; and • covering newly hired state and local workers under Social Security
(and charging them payroll taxes) after 2020. These are among the standard menu options offered by any number of groups over the years to restore long-term sustainability to the Social Security trust fund. The commission proposed phasing in the benefit formula change over a 33-year period, between 2017 and 2050. This has the most significant potential for benefit value change, though the effect over 40 years or more is difficult to project. The com- mission report asserts that, because the benefit calculation thresholds will be indexed to wage growth, future
beneficiaries likely will get at least as large an inflation-adjusted benefit as today’s equivalent beneficiaries. This assumes wages will continue past trends of growing faster than infla- tion. (See the chart below.) The 20-year bump up would in-
crease benefits an extra 1 percent a year for five years, beginning with the 21st year of Social Security eligibility.
Military and federal retirement The commission’s final re- port proposed convening a new panel to recom- mend ways to cut
Proposed Social Security Changes Realign the Benefit Formula
The current Social Security annuity formula (left two columns below) replaces a percentage of average annual earned income, up to the maximum of $107,000, for the highest 40 quarters of earnings, with reduced replacement credit for higher income brackets. The fiscal commission proposal (right two columns below) raises the covered income level but further lowers replacement credit for incomes above the American median, with these changes phased in over 40 years.
Average lifetime earned income brackets
$0 to $9,000
$9,001 to $38,000 $38,001 to $64,000 $64,001 to $107,000 more than $107,000
Social Security
replacement formula (current law) 90% 32% 32% 15% n/a
Impact of Proposed Changes by 2050
The chart below shows how the proposed changes would affect Social Security benefit levels for people with the av- erage incomes in the left column. The lowest income categories would see a greater percentage benefit. Middle-income beneficiaries wouldn’t see much change. Those with incomes above the current $107,000 maximum would see mod- estly larger benefits but also would pay FICA taxes on a greater portion of their earnings during their working years.
Average an- nual earned income $15,000 $60,000 $110,000 $200,000
Current annual Social Security (SS) benefit $10,200 $24,420 $32,150 $32,150
Proposed 2050 annual benefit (in 2010 dollars) $13,500 $27,000 $32,200 $36,700
CHART: NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM
% increase in benefit (2010 to 2050) 32 11
0.16 14
2010 SS annuity as % of average income 68 41
29 16
2050 SS annuity as % of average income 90 45 29 18
MARCH 2011 MILITARY OFFICER 83 Social Security
replacement formula (proposed) 90% 30% 10% 5% 5%
Average lifetime earned income
brackets (proposed) $0 to $15,000
$15,001 to $63,000 $63,001 to $102,000 $102,001 to $173,000
$173,001 to tax maximum
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