Source: Alicia H. Munnell via marketwatch.com

House Ways and Means subcommittee chair proposes 31% cut in benefits

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In December, House Ways and Means Social Security Subcommittee Chairman Sam Johnson introduced a bill to “save” Social Security. The problem is that he accomplishes this goal through a dramatic cut in benefits. As shown below, Social Security costs at the end of the 75-year projection period would be 31% lower than under current law.

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This 31% cut is the result of three major changes:

• raising the Full Retirement Age — currently rising from 66 to 67 — to 69;

• dramatically reducing benefits for above-average earners; and

• eliminating the cost-of-living adjustment (COLA) for individuals with income in excess of $85,000 ($170,000 for married couples) and using a chain-weighted index for those below.

The best way to gauge the impact of these three changes is to examine the ratio of proposed to current benefits at different points in the earnings scale. Because the impact of eliminating the COLA increases over the retirement span, it is helpful to look at individuals at age 85. As the chart below indicates, low earners are basically held harmless, while medium-earner benefits are cut to 77% of those provided under current law, higher earners to 40%, and maximum earners to 34%.

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At first glance, one might conclude that’s a fine outcome — cut the benefits of the well paid and preserve the benefits of the low paid. But look closely at the earnings associated with the categories of well paid. The medium worker, who sees benefits drop to 77% of current law, earned $49,121 in 2016 and the “high” earner, who sees benefits drop to 40% of current law, earned $78,594. These are not rich people.

At first glance, one might conclude that’s a fine outcome — cut the benefits of the well paid and preserve the benefits of the low paid. But look closely at the earnings associated with the categories of well paid. The medium worker, who sees benefits drop to 77% of current law, earned $49,121 in 2016 and the “high” earner, who sees benefits drop to 40% of current law, earned $78,594. These are not rich people.

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