My latest column draws on my AEI colleague Andrew Biggs’s calculation that the average monthly Social Security benefit for an American retiring today is about a third higher, even after accounting for inflation, than the average monthly benefit of those who retired 20 years ago. (This is of course separate from the other reason Social Security spending keeps growing, which is the growth of the retired population.)
A reader asks why benefits have grown so much and why I write that they’ll keep growing. The principal answer is that the formula by which Social Security determines benefits is tied to wages. Real wages grow over time, so Social Security benefits do, too.*
This arrangement has some intuitive appeal. If benefits merely kept up with inflation, over time they would replace a smaller and smaller proportion of a beneficiary’s income during his working years.
The problem is that stabilizing that replacement rate — especially given falling birth rates and the system’s windfalls to previous generations — would require higher taxes. As I note in the column, there is reason to think that most people would prefer to keep more of their money now rather than to give more of it to the federal government in order to get a bigger payout in the future. That preference seems to me very reasonable. But the only way to translate it into policy is to change the formula so as to moderate benefit growth.
* A secondary reason for the growth of average benefits is that people have been claiming them at slightly higher ages. But that doesn’t raise total spending by the program.