Link Initial Social Security Benefits to Average Prices Instead of Average Earnings

Initial Social Security benefits for retired and disabled workers are based on their average lifetime earnings. That average is calculated using a process known as wage indexing, whereby the Social Security Administration adjusts a person’s previous earnings to reflect changes in economywide wages. Average initial benefits for Social Security recipients therefore tend to grow at the same rate as do average wages.

This option consists of two alternatives to change the computation of initial benefits. The first alternative, called pure price indexing, would change the computation of initial benefits beginning with participants who became eligible for benefits in 2022. It would link the growth of initial benefits to the growth of prices (as measured by changes in the consumer price index) rather than to the growth of average wages. Under this alternative, the real (inflation-adjusted) value of average initial benefits would not rise over time, and benefits for each successive cohort of beneficiaries would be smaller than those scheduled under current law. The extent of the reduction would depend on the growth of average real wages, which the Congressional Budget Office projects will average slightly above 1 percent per year for the period 2022 to 2030.

The second alternative, called progressive price indexing, would keep the current benefit formula for workers who had lower earnings and would reduce the initial benefits for workers in later cohorts who had higher earnings. Under this alternative, initial benefits for the 30 percent of workers with the lowest lifetime earnings would increase with average wages for each successive cohort, as they are scheduled to do, but initial benefits for each successive cohort of other workers would increase more slowly, at a rate that depended on their position in the distribution of earnings. For example, for the highest earners—workers with 35 years of earnings at or above the taxable maximum—benefits would rise with prices, as they would under pure price indexing. Thus, under progressive price indexing, the initial benefits for most workers would increase more quickly than prices but more slowly than average wages for each successive cohort. As a result, the benefit structure would gradually become flatter.

CBO projects that under current law, the Disability Insurance trust fund would be exhausted in fiscal year 2026, and the Old-Age and Survivors Insurance trust fund would be exhausted in calendar year 2031. Under section 257 of the Deficit Control Act, in its projections CBO must assume that scheduled Social Security benefits would be paid even after the program’s trust funds were exhausted. However, the government’s legal authority to pay benefits would then be limited to the amount received in dedicated tax revenues, which would be insufficient to pay scheduled benefits in full. After trust-fund exhaustion, therefore, for the people whose benefits would be lower under this option, the reduction in payable benefits would be smaller than the reduction in scheduled benefits.