Minimum Benefits in Social Security Could Reduce Aged Poverty

Brief #11 in the Older Americans' Economic Security series.

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Abstract

Despite Social Security's success at bolstering retirement security, many older Americans remain mired in poverty. Because Social Security does not guarantee a minimum benefit, many long-service, low-wage workers receive benefits that leave them below the poverty line. African Americans, Hispanics, and unmarried women are especially vulnerable. Although productivity gains are likely to reduce old-age poverty over time, Social Security's long-term financing problem makes future benefit cuts likely. This analysis explores two potential minimum-benefit designs and shows that an effective minimum benefit could help protect the highest-risk groups.

Introduction

Although Social Security ties benefits to lifetime earnings, it also redistributes income, replacing a higher share of preretirement earnings for low earners than for high earners. However, it does not guarantee a minimum benefit, and many long-service, low-wage workers receive benefits that leave them below the federal poverty level. African Americans, Hispanics, and unmarried women are especially vulnerable.

This brief considers the effect of a Social Security minimum benefit on the program's adequacy. With benefit cuts looming in the face of Social Security's long-term fiscal deficit, an effective minimum benefit could help protect the highest-risk groups.

Effects of Minimum Benefits on Poverty Rates

Despite Social Security's success at bolstering retirement security, many older Americans remain mired in poverty. Almost 8 percent of Social Security beneficiaries ages 65 and older had incomes below the poverty level in 2004, with some groups especially vulnerable. For instance, almost 10 percent of older beneficiary women—and 17 percent of all unmarried older
women—had incomes below the poverty level. Poverty rates approach 24 percent for older African Americans and 19 percent for older Hispanics (Social Security Administration 2006).

Productivity gains will likely reduce old-age poverty over time. The federal poverty level increases each year with prices, but productivity improvements drive wages (and hence Social Security benefits) even higher. Assuming Social Security pays all benefits scheduled under current law, the poverty rate for all Social Security beneficiaries ages 65 and older will decline to about 5 percent in 2025 and 3 percent in 2050 (table 1). However, unmarried women, African Americans, and Hispanics are expected to remain high-risk groups. (Estimates are based on Urban Institute's Dynamic Simulation of Income Model, DYNASIM3.)

Actual poverty rates are likely to exceed these projections, however, because Social Security's long-term financing problem makes future benefit cuts likely. Although it is impossible to predict how policymakers will choose to balance the system, we assumed that changes would be split equally between benefit cuts and tax increases. Under this scenario, an across-the-board benefit cut of 12.45 percent would cut the long-term Social Security deficit in half by 2050. This benefit cut would raise the 2050 poverty rate among older Americans by about 1 percentage point above the rate projected under current law.

A minimum benefit could mitigate the cutback's potential effects on women and racial and ethnic minorities, but the impact depends on how the minimum benefit is structured. We considered two alternatives.

Note: This report is available in its entirety in PDF Format.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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