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The long-term financial challenges that Social Security face have been well-publicized, with annual looks at the program's financial condition predicting the exhaustion of the Social Security Trust Fund within the next 20 years or so. In response, policymakers have come up with several high-profile solutions, ranging from highly controversial moves to raise the retirement age as high as 70 to eliminating the cap on the amount of annual wages subject to Social Security taxes. Moves such as changing the formula on which Social Security makes its annual cost of living adjustments to benefit amounts have also gained plenty of attention.

But a recent Congressional Budget Office report suggested one potential fix for Social Security's financial woes that hasn't gotten a lot of notice in past years. The proposal involves changing the number of years of work history on which the Social Security Administration calculates benefit amounts. Although the rationale behind the proposal is consistent with changing demographics, it nevertheless could have a disproportionately large impact on the retired poor. Let's take a look at the proposal to understand how much good and harm it might do.

Solution: work a longer career

Source: SSA.

Currently, Social Security calculates retirement benefits by looking at up to 35 years of your work history. For those who've worked longer than 35 years, the SSA takes the highest-earning years after indexing to reflect natural inflation over the course of your career. If you haven't worked 35 years, then the SSA puts in zeroes for the unworked years, which correspondingly reduce your average earnings.

The CBO report took a look at the financial impact of increasing the length of time on which the SSA calculates benefits from 35 years to 38 years. By implementing the change gradually over the next three years, the CBO estimates that the federal government would save $45 billion through 2024, with savings accelerating over the years.

From a net-savings perspective, boosting the computation period for benefits has a surprisingly significant effect. Granted, the measure wouldn't come close to the $116 billion savings from adjusting COLAs or the $204 billion produced by a simple across-the-board benefit cut of 15%. But the expected 10-year savings would top the savings from gradually raising the retirement age to 70, as well as measures to require longer work histories for disability recipients.

Does lengthening the work-history computation period make sense?

On its face, the proposal certainly seems to have some merit. As life expectancy rises, it's not unreasonable to expect careers to lengthen as well. Moreover, with a 35-year work history requirement, those who work continuously throughout their lives can hit their limit by the mid- to late 50s, and that raises the argument that Social Security wasn't meant to make it easier to retire early.

Source: SSA Office of the Inspector General.

Yet when you look at who would bear the brunt of those cost savings, low-income workers suffer disproportionately. According to a study several years ago from the SSA, extending the work-history computation period by three years would cause those in the highest 20% of all earners to endure a 2% benefit cut. For the lowest 20% of earners, though, the loss of benefits would amount to 4.5% -- more than double what higher-earning recipients lose.

Moreover, the SSA study found that poverty rates among the elderly would rise as a result of the move. Granted, limiting the increase to 38 years rather than all the way to 40 years would have a less severe impact. But those who earn relatively little are also most likely to have shorter work histories, and so the shift would add more zero earning years and bring overall averages down significantly.

Given the distributional effects of implementing cost-saving measures like this, policymakers can expect this proposal to generate considerable political debate if it's proposed. Although any effort to make Social Security more financially viable is noteworthy, lawmakers still need to consider the importance of Social Security to the financial health of millions of American retirees before taking steps to cut benefits -- even in the interest in preserving the long-term viability of the entire Social Security system.

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