Measuring Individual Equity

Individual equity is measured for purposes of the illustrations by comparing the value at various benefit commencement ages of the discounted expected value of representative workers’ retirement benefits to the accumulated value of their payroll taxes deemed to fund these benefits. The illustrations only include worker old-age retirement benefits and exclude spouse, survivor, and disability benefits.⁴

Some items to note from the above graph are as follows:

• The ratio is approximately 0.9 at the 50th percentile. This result means that the value of projected lifetime benefits exceeds 90% of accumulated payroll taxes for the lower-earning 50% of projected 2042 retirees.
• Comparing the ratios of 1.6 at the 10th percentile to 1.0 at the 35th percentile and 0.6 at the 100th percentile gives an indication of the degree to which higher-income workers are subsidizing the benefits of lower-income workers.
• The fact that under the study more than 50% of retirees in this cohort receive expected benefits that are less than their accumulated payroll taxes is a consequence of the 24% across-the-board cut in benefits beginning in 2034 under current law.
• Low-income beneficiaries have higher mortality rates than high-income beneficiaries. Using mortality tables that reflect this difference would lower the individual equity ratios for lower-income workers and increase the individual equity ratios for higher-income workers.

Individual equity ratios under current law will decrease as time passes because there is no provision to pay out more in benefits than taxes paid into the Social Security trust fund. So, to the extent that previous cohorts of retirees received more than they contributed, future cohorts will receive less.

• For a cohort of beneficiaries born in 1959 and retiring at age 67 in 2026, the benefits they receive prior to 2034 are fully paid, and the ratio remains above one up to the 40th percentile. For cohorts born in 1975 and 1995 and retiring at age 67 in 2042 and 2062, respectively, all retirement benefits are paid after 2034 at the reduced level, and the ratio remains above one only up to the 35th and 30th percentiles, respectively.
• Figure 2 below graphs individual equity ratios under current law for the 1959, 1975, and 1995 birth cohorts.

Measuring Individual Equity for Three Reform Proposals

The committee intentionally selected proposals from stakeholders of different ideological perspectives for the project. All three proposals would fully fund their promised benefits over a 75-year valuation period and beyond, eliminating the need for the across-the-board reduction in benefits assumed in the current law illustrations. Each proposal would eliminate the trust fund deficit in a different way. The graph below compares the individual equity measurement for the three proposals to current law for a cohort of Social Security beneficiaries born in 1975 and retiring at age 67 in 2042. The vertical lines indicate deciles of AIMEs as in the previous graphs. A high-level summary of the provisions of each proposal can be found in an appendix to this issue brief.

The Bipartisan Policy Center (BPC) Commission on Retirement Security and Personal Savings Proposal

This proposal addresses the deficit by a combination of reductions in benefits and increases in both payroll taxes and other types of income. The principal provisions that address the trust fund deficit are an increase in the payroll tax, an increase in the age at which full benefits are paid, and a change in the way the annual cost-of-living increases are calculated. There would also be benefit increases for lower- and middle-wage workers.

The green line in Figure 3 shows individual equity measurements for the Bipartisan Policy Center proposal. Some items to note are as follows:

• The ratio is above one at and below the 60th percentile, compared to the 35th percentile under current law.
• The ratios are higher than under current law up to the 90th percentile.
• Retirees have ratios around 2.7 at the lowest income levels.
• At the highest level of earnings, ratios are about 0.5.
• The higher payroll tax rate and increase in the taxable maximum would result in an increase in accumulated payroll taxes over current law of about 4% (significantly higher for those earning more than the taxable maximum under current law) for the cohort shown. Most of the increased taxes under the proposal would be paid by workers who retire after 2042 and continue paying taxes while the 2042 retirement cohort is receiving benefits.
• The age at which full benefits would be paid under the BPC proposal is age 67 and 7 months for individuals born in 1975, compared to age 67 for current law. This means that the BPC proposal benefits have been reduced for early retirement, but the current law benefits are not reduced.

Former Rep. Johnson’s Proposal

This proposal addresses the trust fund deficit without raising taxes by increasing the age at which full benefits are paid and reducing benefits for future medium to high-paid beneficiaries. The principal provisions that address the deficit are the increase in the age at which full benefits are paid, the reduction in benefits for the upper 55% of workers, and a change in the way the annual cost-of-living increases are calculated. The proposal also increases benefits for low-income beneficiaries. There are no provisions to increase payroll taxes, the taxable wage base, or other sources of income.

The red line in Figure 3 shows individual equity measurements for the Johnson proposal. Some items to note from the above graph are as follows:

• The ratio is above one at and below the 45th percentile, compared to being above one at and below the 35th percentile for current law.
• The ratios are higher than under current law below the 55th percentile.
• Retirees have ratios around 3.2 at the lowest income levels.
• At the highest level of earnings, ratios are about 0.3. The red line flattens out at the 90th percentile because we have assumed that these retirees will earn total income above the level which disqualifies them for COLAs under this proposal.
• The age at which full benefits would be paid under the Johnson proposal is age 69 for individuals born in 1975, compared to age 67 under current law. This means that the Johnson proposal benefits have been reduced for early retirement to a greater degree than under the BPC proposal.

Proposal from Rep. Larson, Sens. Blumenthal and Van Hollen

This proposal addresses the trust fund deficit entirely with increases in payroll taxes and other types of income. The principal provisions that address the deficit are the increase in the payroll tax and a change in the maximum amount of wages subject to the payroll tax. There are no provisions to decrease benefits. There are modest benefit increases for most beneficiaries, and more significant increases for lower-income beneficiaries.

The blue line in Figure 3 shows individual equity measurements for the Larson proposal. Some items to note are as follows:

• The ratio is above one at or below the 70th percentile compared to being above one at or below the 35th percentile for current law.
• The ratios are higher than under current law at all income levels.
• Retirees have ratios around 3.2 at the lowest income levels.
• At the highest level of earnings, ratios are about 0.75.
• The higher payroll tax rate and increase in the taxable maximum would result in an increase in accumulated payroll taxes over current law of about 5% (significantly higher for those earning more than the taxable maximum under current law) for the cohort shown. As with the BPC proposal, most of the increased taxes will be paid by later retirees.
• The age at which full benefits would be paid for the Larson proposal is the same as current law, age 67, for an individual born in 1975.

Measuring Social Adequacy

The next three sections of this issue brief discuss how social adequacy is measured and provide graphs that compare each proposal to current law based on the principle of social adequacy. Social adequacy is measured for purposes of the illustrations by comparing the Social Security benefit amount calculated at benefit commencement to three benchmarks of income adequacy (converted to monthly amounts) as follows:

• The poverty guidelines for a one-person household for the 48 contiguous states and the District of Columbia, published by the U.S. Department of Health and Human Services,
• 150% of the poverty guidelines, and
• 25% of the national average wage (NAW) used for indexing earnings for Social Security.

One of the goals of Social Security is to provide beneficiaries with income in retirement to protect against financial hardship. In considering whether benefits are adequate, values above a given benchmark can only be considered adequate for purposes of that benchmark. The selected benchmarks provide an illustrative range. The poverty guidelines provide a low benchmark of benefit adequacy. To the extent that a higher benchmark is the goal, values above either 150% of the poverty guidelines benchmark or above 25% of the NAW benchmark could be considered adequate. Wages have increased more rapidly than prices over time so that benefits above the benchmark based on 25% of national average wages would allow retirees to live closer to the standard of living of those still working. There is no generally recognized measure for benefit adequacy.

Figure 4 compares current law Social Security benefits at retirement to the three benchmarks discussed above for Social Security beneficiaries born in 1975 and projected to retire at age 67 in 2042. The vertical lines indicate deciles of AIMEs.

Some items to note from Figure 4 are as follows:

• Beneficiaries at about the 20th percentile and below have benefits that are less than the poverty guidelines. The individual equity ratio for the lowest-paid group was about 1.7, which may seem high until one considers that this value is still not adequate with respect to the poverty guidelines.
• Beneficiaries at the 40th percentile and above have benefits that exceed all three benchmarks.

Measuring Social Adequacy at Early and Late Retirement Ages

Many lower-income beneficiaries retire at age 62, the earliest retirement age under Social Security for which benefits are payable. Social Security benefits beginning at age 62 are generally paid longer over beneficiaries’ lifetimes but are reduced relative to a benefit beginning at the normal retirement age, the earliest retirement age at which unreduced benefits are paid. Higher-income beneficiaries are more likely to commence benefits at higher ages. Social Security benefits payable after age 67 under current law are increased 8% per year. Figure 5 shows the impact on the social adequacy measurement for current law of either retiring early at age 62 or delaying retirement to age 70.

Some items to note from Figure 5 above are follows:

• Beneficiaries at the 45th percentile and below have benefits that are less than the poverty guidelines for those claiming benefits at age 62.
• Beneficiaries at the 80th percentile and above have benefits that exceed all three benchmarks for those claiming benefits at age 62.
• For those claiming benefits at age 70, benefits exceed the poverty guidelines for all income levels.
• For those claiming benefits at age 70, beneficiaries above the 25th percentile have benefits that exceed all three benchmarks.

Measuring Social Adequacy for the Selected Reform Proposals

Figure 6 shows a social adequacy measurement for each proposal6 versus current law for a cohort of Social Security beneficiaries born in 1975 and projected to retire at age 67. The vertical lines indicate deciles of Average Indexed Monthly Earnings (AIMEs).

The Bipartisan Policy Center Commission on Retirement Security and Personal Savings Proposal

The green line in Figure 6 shows social adequacy for the BPC proposal. Some items to note are as follows:

• Benefits at every decile are greater than the poverty guidelines, compared to current law where beneficiaries at or below the 20th percentile are less than the poverty guidelines.
• Beneficiaries at the 20th percentile and above have benefits that exceed all three adequacy benchmarks. This compares to current law, where only beneficiaries at the 40th percentile and above have benefits that exceed all three poverty benchmarks.
• The BPC proposal would provide a minimum benefit for workers who have attained the age at which full retirement benefits are paid. It is greater than the proposed formula benefit for beneficiaries at or below the 30th percentile.
• Above the 50th percentile the slope of the green line is flatter than under current law, indicating the proposed formula replaces a smaller percentage of wages earned than under current law. The bend in the green line at the 90th decile reflects the provision in the BPC proposal that would raise the maximum wage subject to the payroll tax and includes a provision for an additional benefit based on those wages.

Former Rep. Johnson’s Proposal

The red line in Figure 6 shows social adequacy measurements for the Johnson proposal. Some items to note are as follows:

• All beneficiaries have benefits that exceed all three adequacy benchmarks under the proposal.
• The Johnson proposal would provide a fixed minimum benefit equal to 35% of the NAW that exceeds the proposed formula benefit for beneficiaries at or below the 30th percentile. The red line is flat where the minimum benefit is applicable.
• The bend at the 50th percentile under this proposal occurs because the proposed formula would replace only 5% of AIME above this level, compared to 27.5% of AIME just below this level.
• Above the 50th percentile, the slope of the red line is much flatter than under current law, indicating almost a flat benefit.
• The flat line below the 35th percentile and the almost-flat line above the 50th percentile mean that benefits are not closely related to wages (and taxes paid on those wages) in this proposal.
• Increasing benefits for low-wage earners combined with the absence of any tax increase means that while there would be greater social adequacy, there would be less individual equity at higher AIMEs.

Proposal from Rep. Larson, and Sens. Blumenthal and Van Hollen

The blue line in Figure 6 shows social adequacy measurements for the Larson proposal. Some items to note are as follows:

• All beneficiaries would have adequate benefits with respect to all three adequacy benchmarks under this proposal.
• The minimum benefit under this proposal would be equal to 125% of the poverty guidelines for 2019, indexed in future years to NAW. It exceeds the proposed formula benefit for beneficiaries at or below the 20th percentile. It also grows to more than 150% of the poverty guidelines in 2042, because the rate of increase in the minimum benefit is more than the assumed rate of increase in the poverty guidelines (assumed price inflation is less than assumed wage inflation).
• Above the 30th percentile, the slope of the blue line is almost parallel with current law. This outcome is because the Larson formula is very similar to the current law formula and the increases in payroll tax under the proposal allow full benefits to be paid with no 24% reduction in benefits.

Conclusion

The principles of individual equity and social adequacy help sustain public support for the system because they address the needs of both higher wage-earners and lower wage-earners. The system currently provides a trade-off between the principles of individual equity and social adequacy. The balance has changed as the system has evolved. There are no theoretically correct levels of individual equity and social adequacy in the U.S. Social Security system. The current mix is the product of many legislative compromises, which are incorporated into the current version of the Social Security Act.

 Although policies which address Social Security should be considered in the context of other policies regarding retirement income that also impact individual equity and social adequacy, these issues are beyond the scope of this study.

A monograph that provides background and documentation for the study is available. The monograph contains three pages showing 18 graphs that provide a comprehensive view of the results of our study and side-by-side comparisons of social adequacy and individual equity for each of the scenarios shown.

While there are only three reform proposals analyzed for this project, the specific package of provisions within them are indicative of the types of proposals currently under discussion by public policy stakeholders. Changes to Social Security provisions can be varied and combined in a myriad of ways. Readers who want to explore other pathways toward reform are invited to play the American Academy of Actuaries’ Social Security Game.

Appendix: High-Level Summary of Analyzed Reform Proposals *

* This table only includes provisions that had a significant impact in at least one of the analyzed reform proposals.
**This provision was not modeled for purposes of the study. The monograph provides additional information on the limitations of the study.