$100,000 in Social Security benefits is too much

SIGN UP FOR THE DAILY JWR UPDATE. IT'S FREE. (AND NO SPAM!) Just click here.

When someone says a retiree is "living off Social Security," it's not usually $100,000 a year. But some US retired couples will be receiving that much in a few years - and a proposal to cap their benefit at that amount has started a painful and much-needed conversation about who should get government benefits and how much.

America's welfare state is not just a safety net for the most needy or unlucky. Over time, it has become a significant source of income and services for the middle and upper-middle class. There is nothing wrong with that, in principle, if it's what Americans want. In reality, however, the federal government cannot afford it. Cutting benefits for wealthy retirees is an obvious first step, but truly getting the debt under control will require reductions for other people, too.

The $100,000 annual Social Security benefit - which will go to about 0.05% of retired couples at first - may seem unbelievable. But if you and your spouse have both earned the maximum salary for the last 35 years (it was $53,400 in 1991 and is currently $184,000), and you each claim your own benefits, your household will get $99,648 this year, indexed for inflation. If you both wait till age 70 to claim, you'll get nearly $125,000.

Under the proposal, from the Committee for a Responsible Federal Budget, individual benefits would be capped at $50,000 if claimed at the normal retirement age (currently 67 for most people), or $62,000 if delayed to 70. These benefits would not be adjusted for inflation for 20 to 30 years (depending on how it is implemented), and there would be a ceiling on benefits for future higher-earning retirees.

The CRFB, a nonpartisan think tank, estimates that its plan would reduce the Social Security shortfall by one-fifth over the long term and three-fifths over the next 75 years. That's similar to the savings that would be gained if payroll taxes were applied to earnings above $184,000. It's also a better idea, because it avoids a very large tax increase and, at least for the first decade or so, would be more progressive.

Most other wealthy countries don't offer such generous public benefits. In the US, if you and your spouse earned at least the taxable maximum for most of your careers, you probably have other forms of saving (or at least the ability to save) and don't need more than $100,000 from the federal government.

But Social Security was never just about needs. It is intended to be both an insurance program to keep people out of poverty in old age, and a savings program to replace a decent share of income. Offering such generous benefits may have been realistic when the population was younger and payroll taxes were only 2%. Now the population is older and payroll taxes are 12.4%; if nothing is done, benefits will be cut more than 20% in 2034.

Besides which, most people don't get anywhere near $100,000. The average household benefit is $34,000. A $100,000 cap sounds like a no-brainer today, but after 20 years of no inflation or wage adjustments (especially if there is a period of high inflation), it would start to affect the retirement of the non-rich. Two decades from now, $100,000 will still be a meaningful amount of money, but it will probably be less than median household income, which is now about $85,000. For the upper-middle class, it will be a non-trivial benefit cut.

But there is no way to restore solvency to Social Security without people feeling some pain. All else being equal, this is a good option. The pain wouldn't be felt for at least a decade, which will give higher earners time to save more.

A $100,000 cap would also buck a trend of providing more benefits to high earners. Families who make six figures get subsidies to pay for everything from a house to a college education, and the desire to expand benefits is growing. In New York City, even families that earn half a million dollars a year can qualify for free pre-school.

Of course any benefit limit would change the character of Social Security. Yet since the program was created in 1935, the welfare state has grown to offer benefits for the middle and even upper-middle class. For those who favor a more generous welfare state - and the higher taxes to pay for it - a benefit cap is anathema. But for those who prefer a smaller welfare state that targets the most needy, and worry about the government's runaway debt, capping benefits is both necessary and overdue.

(COMMENT, BELOW)

Allison Schrager, a Bloomberg columnist, is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.

Previously:
• The Laffer Curve is no longer a punch line
• Yes, Americans are saving enough for retirement
• Is free trade worth the cost in lives lost?
• Mamdani's New York is flirting with fiscal nihilism
• America's human capital is eroding
• Musk is wrong about AI and retirement --- You still need to save
• Go ahead and resent boomers but for the right reasons
• Raiding your 401(k) to buy a house should be an option
• Americans are living in the worst of all tax worlds
• Think of college like you would a junk bond
• The economy needs a little bit of unfairness
• The pension revolution is better for savers
• Affordability isn't a hoax. It's not a crisis for most, either
• America gets retirement wrong. Can Vanguard fix that?
• The American middle class is shrinking, and that's OK
• Want to buy a home? It's OK to wait till you're 40
• Mamdani is benefiting from New York City's changing workforce
• How can an economy this good feel this bad?
• Why boomers have more money than everyone else
• Democratize private investment?
• Lab-grown diamonds are testing the power of markets
• Inflation ate your free lunch, but you're still better off
• Good debt? Bad debt? There's no such thing
• Megabills didn't break the economy before and won't now
• America's broken politics is breaking economics, too
• A college degree is no longer a risk-free investment
• Break up Columbia? Maybe, and the rest of the Ivy League, too
• Even Dems might like MAGA accounts
• Reality Check about possibile volatility in trade war
• Is this really how American exceptionalism ends?
• The free-market conservative is a vanishing breed
• Shareholder capitalism is back
• Europe's risk aversion comes with consequences
• The Oxford curriculum that American universities need
• Private equity won't diversify your portfolio
• The era of declining interest rates may have come to an end, and many investors don't seem to realize it
• This one weird trick could save the U.S. economy
• The Fed's damage to the housing market may last years
• The future of unions looks very different
• To bring back the office, bring back lunch
• Does it really matter who gets into Harvard?
• Our pensions shouldn't be used to juice the economy
• A soft landing won't mean the economy is safe
• The 30-year mortgage is saving the U.S. economy … or is it?
• The one true secret to successful investing
• Less work, more burn-out
• When did risk become a bad word in the U.S.?
• AI-proofing your career starts in college
• Biden has to learn the same lesson as SVB
• Say it with Rubio: Changing clocks is stupid
• Sure, we'll return to the office in 2023 but not to stores
• How to manage the biggest risk of all: Uncertainty
• If you think U.S. pensions are safe, just wait
• Harry and Meghan and the perils of superstar culture
• Norman Rockwell's economy is never coming back
• Burned by crypto? Don't learn the wrong lesson
• Quiet Quitters are looking in the wrong place for meaningful work
• America's MBAs are the latest skeptics of capitalism
• Generation Z is getting a harsh lesson in stock risk
• The biggest threat to the U.S. economy is policymakers
• Buck up, boomers. You're still better off than your parents
• How to manage the biggest risk of all: uncertainty
• Startup boom is the kind of risk-taking Americans need
• Gen Z is too compliant to achieve greatness
• A bigger child tax credit isn't the poverty solution we need
• Finding your power in a higher-priced world
• The Biden administration's plans to double the tax rate on capital gains will prove costly to all Americans, not just the wealthy
• WARNING: Feel Good Now --- Pay Later: Stimulus is crammed with goodies but makes no economic sense
• The 'Stakeholder' Fallacy: Joe Biden's vision of capitalism is a recipe for failure