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The Impact of Social Security Cuts on Retiree Income

The Impact of Social Security Cuts on Retiree Income

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There has been a serious push in policy circles to cut Social Security benefits for near- and/or current retirees. The argument for such cuts has been based on the deficits in the federal budget; the finances of the Social Security program have been at most a secondary consideration. However, the finances of the current or near-retirees who would be affected by these cuts have also largely been ignored in this discussion. This is striking because this group has been hardest hit by the collapse of the housing bubble and the resulting plunge in stock prices. These workers had accumulated some wealth – mostly in the form of home equity – which they stood to lose as a result of the crisis. Since they are at or near retirement age, they will have little opportunity to replace their lost wealth.
There has been a serious push in policy circles to cut Social Security benefits for near- and/or current retirees. The argument for such cuts has been based on the deficits in the federal budget; the finances of the Social Security program have been at most a secondary consideration. However, the finances of the current or near-retirees who would be affected by these cuts have also largely been ignored in this discussion. This is striking because this group has been hardest hit by the collapse of the housing bubble and the resulting plunge in stock prices. These workers had accumulated some wealth – mostly in the form of home equity – which they stood to lose as a result of the crisis. Since they are at or near retirement age, they will have little opportunity to replace their lost wealth.

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Published by: Center for Economic and Policy Research on Jul 12, 2010
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The Impact of Social SecurityCuts on Retiree Income
Dean Baker and David Rosnick
 July 2010
Center for Economic and Policy Research
1611 Connecticut Avenue, NW, Suite 400Washington, D.C. 20009202-293-5380www.cepr.net
 
CEPR The Impact of Social Security Cuts on Retiree Income
i
 
Contents
Executive Summary...........................................................................................................................................1
 
Introduction........................................................................................................................................................3
 
 The Impact of Progressive Price Indexation.................................................................................................4
 
Raising the Normal Retirement Age...............................................................................................................6
 
Reducing the Cost-of-Living Adjustment....................................................................................................10
 
Conclusion........................................................................................................................................................15
 
 Appendix...........................................................................................................................................................16
 
 Acknowledgements
 The authors thank Alan Barber, Nicole Woo, and Kris Warner for helpful comments.
 About the Authors
Dean Baker is an economist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. David Rosnick is an economist at CEPR.
 
CEPR The Impact of Social Security Cuts on Retiree Income
1
 
Executive Summary
 There has been a serious push in policy circles to cut Social Security benefits for near- and/orcurrent retirees. The argument for such cuts has been based on the deficits in the federal budget; thefinances of the Social Security program have been at most a secondary consideration.However, the finances of the current or near-retirees who would be affected by these cuts have alsolargely been ignored in this discussion. This is striking because this group has been hardest hit by thecollapse of the housing bubble and the resulting plunge in stock prices. These workers hadaccumulated some wealth – mostly in the form of home equity – which they stood to lose as a resultof the crisis. Since they are at or near retirement age, they will have little opportunity to replace theirlost wealth. This paper assesses the cuts implied by three common proposals for reducing Social Security benefits:1) Adopting a “progressive price” indexation (PPI) formula for the basic benefit structure,2) Accelerating and extending the increase in the normal retirement age, and3) Reducing the annual cost-of-living adjustment.It calculates the implied cut in benefits and projected income for various age groups and incomequintiles of retirees and near-retirees.It shows that:
 The most frequently suggested PPI formula would imply cuts in benefits of 6.2 percent for ahousehold in the middle quintile between the ages of 45-49 in 2007. This would translateinto a 3.7 percent reduction of income. This would be roughly equivalent to a 3.7 percentagepoint increase in the tax rate imposed on these middle-income households.
 This PPI formula implies a cut in benefits for middle quintile households between the agesof 40-44 in 2007 of 9.6 percent. This would translate into a reduction in income of 6.4percent.
Raising the normal retirement age to 70 in 2036 (compared to age 67 in 2022 under currentlaw) would lead to a 4.0 percent reduction in benefits for workers between the ages of 50-54in 2007 and a 10 percent reduction in benefits for workers between the ages of 40-44.
 This accelerated increase in the normal retirement age would imply a 3.1 percent reductionin retirement income for workers between the ages of 50-54 in the bottom quintile. Itimplies a cut in retirement income of 7.9 percent for workers in the bottom quintile betweenthe ages of 40-44.
Proposals to change the annual cost-of-living adjustment will reduce benefits for bothcurrent and future retirees. A 1.0 percentage point reduction in the annual cost-of-living adjustment (as widely advocated in the 90s) would imply a cut of almost 12 percent inbenefits for a retiree at age 75 and more than 20 percent for a retiree at age 85 (assuming retirement at age 63).

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