Revitalizing Social Security: Effectively Targeting Benefit Enhancements for Low Lifetime Earners and the Oldest Old

The text below is an excerpt from the complete document. Read the full written testimony with references in PDF format.

Abstract

I argue that Social Security benefits for long-term, low-wage workers are modest and need to be increased. There are many ways to bolster benefits for low-income retirees, each with strengths and weaknesses, so technical details of each proposal will determine its effectiveness. Any Social Security reform package will include multiple provisions that interact with one another. Certain provisions to help low-earners may be more or less desirable depending on a package's other components. Finally, some low-income older and disabled Americans are beyond Social Security's reach. To help them, Congress should consider expanding the Supplemental Security Income program.

Executive Summary

Mr. Chairman and members of the committee: Thank you for the opportunity to testify. I will focus on four key points:

• First, Social Security benefits for long-term, low-wage workers are modest and need to be increased.
• Second, there are many ways to bolster benefits for low-income retirees. Each has strengths and weaknesses. The technical details of each proposal will thus determine its effectiveness.
• Third, any Social Security reform package will include multiple provisions that interact with each other. So certain provisions to help low-earners may be more or less desirable depending on other components of the package.
• Finally, some low-income older and disabled Americans are beyond the reach of Social Security. To help them, Congress should consider expanding SSI, the Supplemental Security Income program.

My first point is about the need to reduce poverty risk by shoring up Social Security for long-term, low wage workers.

About 10 percent of Americans age 65 and older live in poverty, and many more have incomes that leave them just barely above the poverty line.

Low-wage workers' Social Security benefits are modest, both compared to benefits in other developed countries and compared to basic needs. For example, someone who spent 35 years working full-time at the minimum wage who retired at 62 would receive a Social Security benefit equal to only 83 percent of the poverty level.

Many low lifetime earners don't even get that much. Many drop out of the labor force for a time or work only part time, often to care for children, disabled family members, and frail parents. Also, recessions hit them especially hard, and they are more likely than others to become disabled.

This leads to my second point: We can bolster benefits for these vulnerable earners in different ways, with varied strengths and weaknesses.

Let me start with minimum benefits because of their prominence in reform packages. They are highly cost-effective, and directly address the problem of wage stagnation that has hurt less-educated workers in recent decades.

Our models show that within 5 to 10 years of enactment, certain minimums could lift tens of thousands of Social Security beneficiaries out of poverty. By mid-century, they could help almost a million people every year.

Minimum benefits with stricter work years definitions would have smaller effects, but would cost less and maintain Social Security benefits' strong ties to time in the labor force.

That is the challenge in designing a minimum benefit: the better it is at alleviating poverty, the worse it sometimes is at rewarding work. Really large minimum benefits could weaken the relationship between taxes paid and benefits received. Given the fiscal challenges ahead, Social Security must continue to reward long-time workers.

Another interesting Social Security adequacy proposal would increase benefits at older ages, say when folks are in their 80s and older, through a longevity insurance bonus or index. This addresses the risk that people might outlive their assets. Such benefits would be targeted toward a time of life when work ability is most limited and would ensure that older seniors' incomes kept up with standards of living for workers. But some of these benefits would go to well-off seniors who don't need extra help. Without caps, then, longevity benefits may be less effective at reducing poverty than other equally costly approaches.

Proposed spouse and survivor benefit changes often try to increase the program's fairness—for example, making benefits more equal for single- and dual earner-married couples. A challenge for these proposals is that trying to make benefits fairer for some couples often makes benefits less fair for unmarried workers who paid the same payroll taxes. Some of these proposals are also fairly costly—caps can help.

Caregiver credit options try to deal with most of the limitations of spouse and survivor benefits. They could effectively serve many single parents, who now often fall through the cracks. Like minimum benefits, they also tend to be quite cost-effective and are very progressive.

But, they're not always fair for caregivers who earn more than the credit level. And they're hard to administer.

So, details matter. Without careful design, large vulnerable groups could be left out, diversity within groups may be overlooked, and benefit improvements could become less effective over time.

My third point is that in any Social Security reform package, provisions are going to interact.

Sometimes people say that solving Social Security's financing needs is just an arithmetic problem—we just need to raise some taxes and cut some benefits.

But different tax increases and benefit cuts affect workers and beneficiaries very differently. For example, reductions to cost-of-living adjustments would affect the oldest-old more than other beneficiaries.

I've simulated many Social Security packages in which the impact of an adequacy adjustment that appeared to be highly effective in isolation has been largely wiped out by other elements in the package.

That's why it's critical to look at packages in totality—the whole is often quite different from the sum of its parts.

My final point is that Social Security can't do it all.

SSI was designed to aid those with limited work histories. It has languished over the past 35 years, and needs to be updated if it's to play more of a role in reducing need among rapidly aging baby boomers. For example, increasing SSI's asset test would be an especially costeffective way to alleviate poverty among older women. Given the increasing share of defined contribution employer-provided pensions, Congress could reconsider the way SSI treats these types of pensions.

Thank you. I welcome questions and discussion.

(End of excerpt. The full testimony with references is available in PDF format.)

Usage and reprints: Most publications may be downloaded free of charge from the web site and may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact publicaffairs@urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.

Disclaimer: 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. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute.