How Social Security became less generous

Social Security benefits have been a key element of federal employees’ overall retirement package since the creation of the Federal Employees Retirement System in 1986. Along with the basic federal retirement benefit and employees’ own savings and investments in the Thrift Savings Plan, they make up the range of income sources available to federal workers as they contemplate retirement.

But Social Security is not cast in stone. Benefits and the regulations that implement them are subject to change by Congress at any time. And in recent years they’ve changed in the direction of becoming less generous in terms of replacement of wages earned while working.

Social Security benefits are based on the indexed average of the highest 35 years of wages on which an employee has paid the Social Security tax (known as FICA). The benefit formula is structured in such a way that it provides a greater replacement of pre-retirement wages for lower earners and lesser replacement for high earners. 

Social Security benefits are payable as early as age 62. But the amount is permanently reduced by 30% of the full benefit for those born in 1960 or later. For example, a worker retiring at 65 in 2023 with past average earnings of $105,835 would receive a benefit amount of $32,345. The amount is 30% lower if they file at age 62. 

In 2023, the average Social Security benefit was $1,782 per month, or $21,384 per year. For someone who worked all of their adult life at average earnings ($66,147 per year) and retired at age 65 in 2022, Social Security benefits replace about 37% of past earnings ($24,463). But that replacement rate has fallen as the program’s full retirement age gradually rose from 65 in 2000 to 67 in 2022.

This shift from the simple and hands-off model of the single-benefit Civil Service Retirement System has been accompanied by a decline in Social Security benefits relative to pre-retirement earnings. The amendments to Social Security enacted in 1983 that increased the retirement age means benefits payable at 62 (for those born in 1960 or later) are now only worth 70% of the full benefit, compared with 80% when the full retirement age was 65 (for those born in 1937 and earlier). 

The 1983 amendments were enacted in an effort to permanently solve the problem of funding the Social Security trust fund, known as Old Age and Survivors Disability Insurance. But that didn’t happen. And according to Social Security’s chief actuary, lawmakers face further choices in addressing the OASDI shortfall in the coming years. 

The choices include raising scheduled revenue by 2034 by about one-third, reducing scheduled benefits over the same time period by about one-fourth, or some combination of the two. That is going to leave members of Congress with some very difficult decisions to make.