Workers with Low Social Security Benefits: Implications for Reform

Abstract

Low Social Security benefits are strongly related to individual characteristics and earnings histories. These associations suggest ways of shoring up Social Security and adopting other policies to help low-wage, low-skilled workers achieve more labor market success and greater retirement security. Social Security enhancements to aid beneficiaries with intermittent histories include caregiver credits or a minimum benefit that integrates caregiving, unemployment, and disability credits. To meet long-term, low-wage workers' needs, policymakers could adjust Social Security's bend points or replacement percentages; create a new minimum benefit; or adjust current law's special minimum benefit so it provides support greater than the poverty level.

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Introduction

As proposals to close Social Security's long-term funding gap gain attention, it's important to understand why some older Americans end up with low Social Security retirement benefits. Proposals that consider up-to-date information about whom the current system fails to shield from poverty or near-poverty and how these groups may change in coming decades stand a better chance of reducing beneficiary need in retirement. With the recent recession creating economic hardship for many American families and battering government budgets at all levels, Social Security's resources must be targeted efficiently.

Social Security has substantially reduced need among older Americans. Between 1959 and 2008, the poverty rate for adults age 65 and older fell from 35 to 10 percent (DeNavas-Walt, Proctor, and Smith 2009). Average Social Security benefits have increased relative to the poverty level over the past 35 years because wages, which determine Social Security benefits, have grown about 1 percentage point faster on average than prices each year (figure 1). By 1982, men's average retired worker benefit equaled the poverty level for an individual, and by 2009 it exceeded 1.4 times the individual poverty level.¹ Women's average retired worker benefit has also grown relative to the poverty level, although it reached the individual poverty threshold only in 2007.

However, benefit levels vary widely, and many receive limited Social Security payments. In 2009, about 36 percent of retired workers and nondisabled widows received benefits that fell below the individual poverty level (Favreault 2010).

This brief identifies the characteristics of Social Security beneficiaries age 64 to 73 with family benefits below the poverty level in 2003. We focus on these relatively young retirees because older beneficiaries provide less useful information about how the system should be reformed for future generations, given the rapid change in women's work histories and the growth of the Social Security system. We identify factors associated with low benefits, describe how they are changing, and discuss what this implies for future Social Security adequacy and reform proposals. Data come from the Health and Retirement Study, a large survey of older Americans with matches to administrative benefits and earnings records. Favreault (2010) provides additional details.²

Older Americans with limited Social Security benefits share a number of characteristics. They are disproportionately women, racial minorities, and unmarried. Many spent time out of the labor force caring for young children. Less-educated workers are also very vulnerable, sometimes even when they have worked long careers.

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