Social Security benefits don’t come out of thin air — it takes not only contributions but also formulae to determine benefit amounts. In a recent report, the Congressional Research Service (CRS) discusses the possible effects of adjusting computation years, one of the factors used to determine benefits.
What Computation Years Are, and Why They Matter
Social Security benefits are linked to a worker’s career-average, wage-indexed earnings in Social Security–covered employment. Computing a retired worker’s benefits involves three main steps:
1. First, a summarized measure of lifetime Social Security-covered earnings is computed. That measure is the Average Indexed Monthly Earnings (AIME), which is based on the highest 35 years of wage-indexed earnings for retired workers.
2. Second, a benefit formula is applied to the AIME to compute the primary insurance amount (PIA), which is the worker’s basic benefit amount before any adjustments are made (as noted in step 3 below). To do this, the AIME is sectioned into three brackets (or segments) of earnings, which are divided by dollar amounts known as “bend points” that are indexed to average earnings.
3. Third, an adjustment may be made based on the age at which a beneficiary chooses to begin receiving benefits. The unadjusted PIA is payable for retired workers who claim benefits at their full retirement age (FRA, ranging from age 65 to 67 depending on year of birth) and for disabled workers. Retired workers who claim earlier than the FRA receive monthly benefits that are lower than the primary insurance amount PIA, and those who claim later than the FRA receive monthly benefits that are higher than the PIA.
Under law enacted in 1976, a retired worker’s career-average earnings are measured by the highest 35 years of wage-indexed earnings. Those 35 years are known as the computation years.
The CRS report suggests that retired workers with more than 35 years of covered earnings may have less incentive to work for another year, because the additional earnings would not be included in the benefit calculation if they are lower than the highest 35 years of indexed earnings. Conversely, workers with less than 35 years of covered earnings may have more incentive to work, because additional earnings would be included in benefit calculation.
The Social Security Administration (SSA) estimates that, between ages 22 and 67, younger age groups tend to have smaller percentages of workers with 35 or more work years during their lifetimes than do older cohorts. The SSA attributes this to the increase in foreign-born workers, who it says likely arrive at later ages and therefore have shorter remaining working lives.
Changing the Computation Years
The report outlines a variety of proposals to change the number of computation years used in the Social Security benefit calculation and the effects they could have.
Increasing the Number of Computation Years. SSA estimates that increasing the number of computation years from 35 to 40 would affect those aged 60-68 in 2030, those aged 60-88 in 2050, and virtually all beneficiaries in 2070. The estimates show that almost one-quarter of beneficiaries would receive lower benefits than under current law in 2030; 70% would in 2050; and 78% of beneficiaries in 2070 would have lower benefits than under current law.
They add that the benefit decrease would be relatively larger for average beneficiaries with less than a high school education, those in poverty, and those with the lowest level of household income.
At the same time, the SSA also projects that approximately two-thirds of current-law beneficiaries born in the 1960s would receive higher initial replacement rates than under current law if the number of computation years were increased from 35 to 40, whereas 2% would receive a lower replacement rate. The top 50% of earners born in the 1960s would receive a 2% increase in replacement rates; the increase would be 6% or more for the top 10% of earners.
Arguments for Increasing the Number of Years. Supporters of increasing the number of computation years point out that it would better reflect a worker’s complete earnings history. That is, one could argue that 35 years is arbitrary. The selection of the original FRA (i.e., 65 years) — and, presumably, the number of computation years — was based on state old-age pension systems and what costs the actuarial estimates suggested the program could support. However, since its inception, the program has changed (1) in scope, as disability insurance was added in 1956, and (2) in scale, as the program now covers about 94% of workers as compared to about 50% when it started.
In addition, they observe, the people the system covers have changed as well. To wit:
In 1945, the period life expectancy at birth was 62.9 years for a male and 68.4 years for a female. Thus, in 1945, shortly after Social Security began regular monthly payments, the average newborn male was not expected to reach FRA (i.e., age 65), and the average female was not expected to live more than a few years beyond FRA.
In 2020, the period life expectancy at birth was 74.5 years for a male and 79.7 years for a female. Thus, males and females born in 2020 can expect at birth to live about 11 years longer than those born in 1945. In short, workers on average are capable of living longer. However, the number of computation years has remained static.
Supporters also argue that increasing the number of computation years would likely:
- encourage people to work longer;
- improve individual equity (those who contribute more in payroll taxes would receive more in benefits); and
- improve the funding of Social Security.
Arguments Against Increasing the Number of Years. Those who oppose increasing the number of computation years say that taking such an action would allow more years of lower earnings to be included in the benefit calculation, which would reduce the monthly benefit payable to most beneficiaries relative to current law. Further, the CRS says that research finds that this benefit reduction would disproportionally affect individuals with low lifetime earnings and women, who are more likely to take time out of the labor force for child or elderly care and experience shorter careers.
To alleviate these effects associated with lower benefits, the CRS notes that research suggests providing additional benefit support to certain groups while extending the number of computation years. For example, one study suggested accompanying a computation-year increase with a minimum benefit, which researchers found would mitigate the benefit reduction from increasing the number of computation years, especially for those with low lifetime earnings.
Another study suggested crediting women with across-the-board covered earnings for one, two, or three years (presumably to account for time out of the labor force due to child care) and found that would have a substantial effect on their level of benefits.
Decreasing the Number of Computation Years
Not all workers have 35 years of earnings, notes the CRS. There are many possible explanations for an employee to have an earning history with gaps, it says. For instance:
- taking time off from work in order to obtain additional education;
- unemployment;
- caregiving;
- health problems; and
- work-related limitations that do not meet Social Security definition of disability.
Decreasing the number of computation years to more accurately reflect time in which a worker was employed — rather than time in which he or she could have been employed — could ensure that future Social Security benefits reflect individual experiences, says the CRS.
Proposals to decrease the number of computation years usually target certain segments of the population that have shorter careers, typically fewer than 35 years.
Although most workers would receive higher benefits if the number of computation years were decreased their initial replacement rates would decrease as a result of now having higher career-averaged earnings, the report further explains. That is, workers’ future benefits would increase, but the measure reflecting career earnings — the AIME — would increase by a larger amount.
And decreasing the number of computation years would affect not only individuals, says the report. It also would lead to an increase in future benefit amounts and therefor increase program costs. Further, it would worsen the long-range actuarial balance and decrease the level of payable benefits at the point at which asset reserves are exhausted.
A Wash?
The CRS says that actuaries have projected that such an increase in the computation years would eliminate 13% of the long-range actuarial balance of the combined OASDI trust funds and not affect the year at which asset reserves are projected to be depleted. In short, although it would improve the financial status of the program, it would not eliminate the financial shortfall.
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