A Flat Social Security Benefit Could Save the System — Or Threaten It

A little more than a quarter (28%) would oppose this change, the survey shows, while 34% aren’t sure.

The retirement researcher David Blanchett is in the latter camp, telling ThinkAdvisor he has “mixed feelings” about the flat benefit concept. Others, including the former Social Security official Andrew Biggs, said they favor the approach, suggesting it would bring the U.S. into closer alignment with the public pension strategies seen in other prosperous nations.

'A Serious Threat' 

“It’s obviously quite different from the current system, but it’s more consistent with how government pension plans tend to work globally,” Blanchett said. “At their core, I see programs like Social Security as a means to keep older Americans out of poverty. This could help with that through the higher base benefit.”

However, Blanchett observed, the flat benefit approach would also significantly reduce benefits for higher earners — breaking the longstanding “promise” that their higher lifetime payments into the Social Security system will be recognized with a higher lifetime payout.

This is a fear cited in written comments shared by Michael Finke, a professor and Frank M. Engle Chair of Economic Security at the American College of Financial Services.

“One reason why Social Security is such a popular government program is that it is designed to be ‘fair’ in terms of benefits,” Finke wrote. “Those who have contributed far more will get a higher benefit, although the formula is still very progressive. Those who contribute less will get a higher percentage of what they put in. It’s a sneaky way to ensure political support among those who vote at higher rates despite being designed to benefit lower-income workers.”

Pivoting to a flat payment after creating expectations of a higher benefit among these workers would likely result in a dramatic loss of political support among higher earners, Finke suggested. It could also leave their well-crafted retirement income plans completely out of date.

“This would be a serious threat to the system,” Finke said. “A better approach would be to tweak the current system to be more sustainable in a way that maintains a degree of fairness while providing much-needed income support to lower earners.”

In the Cato survey, support for a flat benefit declines when the policy is framed in terms of equality of benefits. That is, slightly more oppose (35%) than support (32%) switching to a flat monthly benefit when the approach is framed as “giving everyone the same benefit” regardless of how much they contributed to the system.

Blanchett suggested a hybrid approach that combined the current system with a higher flat base benefit would be “more palatable and potentially more equitable.”

“For example, right now there are three bend points when estimating benefits: 90%, 32%, and 15%, and these are subject to an earnings max of $175,100,” Blanchett observed. “I’m honestly not sure what the right thresholds would be, but something like a $1,000 base benefit plus 15% of indexed earnings would be a way to both increase the initial benefit while allowing workers who have paid more into the system to get at least a slightly higher benefit.”

A Big Change to Retirement Income

Prior research shows that many retired Americans have household incomes that are much less than the national median of about $81,000. A recent report from SmartAsset, citing Census data, found retirees’ average annual household income is roughly $54,000 nationwide. This total represents a combination of about $24,000 in Social Security benefits and supplemental income from designated retirement accounts of some $30,000.

The study noted, however, that average retirement account withdrawals and Social Security benefits vary widely from city to city, ranging from $33,000 to more than $85,000 in more affluent areas. Clearly, moving to a flat benefit formula would have a substantial impact on the income expectations of many Americans, boosting projected income for low earners and reducing income for high earners.

Beyond changing individual Americans’ benefits, moving to a flat benefit formula would also represent a major change in the nature of the Social Security program and would require a massive public education effort — starting from what can only be described as a low degree of awareness about Social Security’s existing rules and requirements.

According to Cato, just 60% of survey respondents currently understand that workers who pay more into Social Security get higher benefits than those who paid in less. Fifteen percent already think all retirees receive the same benefit, and 25% aren’t sure.

“There are also considerable knowledge gaps pertaining to the actual amounts disbursed,” the report notes. “Ninety-one percent of Americans did not know that the highest annual Social Security benefit can reach $60,000 a year. When it comes to estimating the average benefits Americans receive, only 25% correctly answered that the average benefit is $20,000 to $29,000 per year.”

A Better Approach?

Biggs, for his part, has argued for a flat — or at least flatter — Social Security benefit for some time.

He explained to me in an email that the United Kingdom, Australia and New Zealand use some variant of a flat benefit. In the UK, a flat benefit is adjusted according to the number of work years, while in Australia, there is a flat benefit with a means test. New Zealand, for its part, has a flat benefit with no means test.

“A flat benefit would improve the safety net for low earners but also would require middle and high earners to save more on their own,” Biggs said, noting that the Congressional Budget Office has previously scored a flat benefit reform option. “These options would balance Social Security's finances over the long term.”

However, Biggs noted, the CBO numbers assume that the new flat benefit would be implemented immediately — meaning that benefits would be a lot different for people retiring next year than they would be this year.

“In reality you’d need a phase-in period, where you'd gradually increase the minimum benefit while gradually reducing the maximum benefit,” Biggs said. “I discussed that type of stuff in a book chapter from a couple of years ago.”

In the work, Biggs argues that Congress should complement Social Security reforms by establishing supplementary retirement accounts funded by employer, employee and government contributions. In conjunction with Social Security benefits, he concludes, these accounts would enable seniors to maintain their standard of living in old age.

Pictured: John Manganaro