Social Security remains the largest federal spending program. After Medicare, it’s the second-largest driver of long-term deficits. As the new Republican House majority looks to rein in the budget, Social Security reforms could be on the table.
Though vital to addressing the national debt, getting a comprehensive reform package—or any major entitlement reform—through Congress will be tough. Instead, lawmakers might consider a simple but meaningful start: capping the maximum retirement benefit. A cap would put a dent in Social Security’s 75-year funding gap of more than $20 trillion and send a message that government benefits to high-income retirees can’t be unlimited.
Social Security is often described as a safety net against poverty in old age. But if every senior simply received a benefit equal to the 2022 poverty threshold—just over $14,000 for a single retiree and about $17,600 for couples—Social Security’s $1.3 trillion annual cost for 2023 would be nearly cut in half.
Social Security is expensive because it’s more than a safety net: The average new retiree in 2021 received an annual benefit of nearly $21,000, 1.5 times the poverty threshold without counting their own savings. And the highest-earning Americans receive even more than that, with the maximum benefit at the normal retirement age of 67 coming in at $42,238 in 2023. This blows through any reasonable idea of a safety net: It’s more than three times the federal poverty threshold and about 5% higher than the median employee’s salary in the U.S. It’s also two to three times higher than the maximum benefit paid in the United Kingdom, Canada, Australia and New Zealand.
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Social security’s maximum benefit increases every year. In 2000 it was about $28,300 in inflation-adjusted dollars, about a third less than today. By 2035 the maximum Social Security benefit will reach $49,825 and by 2050 it will rise to $59,234.
For a single, high-income retiree $42,238 should be more than enough to get by in most parts of the country. That’s why, in future years, the maximum Social Security retirement benefit should be capped at the 2023 value, adjusted for inflation. Retirees entitled to less would receive their benefit as promised, but those entitled to more would be limited to that amount.
To receive the top benefit, a person must have worked 35 years or more at the maximum salary taxable by Social Security, which would have averaged to about $117,000 a year for someone retiring today. It’s likely that these Americans are already saving for retirement on their own, with total national retirement savings having more than doubled in the past two decades.
Would capping the maximum benefit be enough to fix Social Security? Not even close. I estimate that by 2050, average benefits for new retirees would be about 12% lower, driven entirely by reductions for retirees with the highest benefits without changing benefits for typical retirees. Though a move in the right direction, further changes are needed to guarantee the program’s solvency.
A better approach would not merely cap the maximum benefit, but boost benefits for low earners and provide every worker access to a retirement plan. But after nearly four decades of congressional neglect, a journey of $20 trillion can start with one small step.
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Mr. Biggs is a senior fellow at the American Enterprise Institute. He has been nominated to serve on the Social Security Advisory Board.
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Appeared in the January 31, 2023, print edition.
