Social Security Reform and Benefit Adequacy

No. 17 in Series, "The Retirement Project"

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.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Over a third of all retirees, including more than half of retired women, receive monthly Social Security benefits that are less than the poverty level for a single elderly individual. Many receive benefits this low despite having worked under Social Security and contributed for more than 30 years. Any significant reduction in the benefits of these people would have serious consequences for both the adequacy of income among the elderly and for the 1935 social commitment to provide a floor of protection in retirement to those who contributed to Social Security while working.

This brief focuses on Social Security retirement benefit payments to low-wage workers and how current changes in the retirement age and likely future cost-cutting reforms could affect these benefits. The analysis begins by comparing the average level and distribution of current benefits with several benchmarks of benefit adequacy, using data on actual benefit awards in 2001. Information from the University of Michigan's Health and Retirement Study (HRS) is then used to simulate the impact on benefit adequacy of both the retirement-age increase and the further benefit reductions that would also be required to restore long-range fiscal balance to the Social Security program.¹ The brief concludes with some observations about the implications for future program policy.

Social Security is an income-transfer program based on a social contract. In return for payroll tax contributions while employed, workers are promised income support when they retire or become disabled. Benefits are related to prior contributions, but the relationship is not proportional. Those who contribute more while working or work more years receive higher benefits when retired. But in keeping with the social aspects of the program, the benefits paid to lower earners replace a larger percentage of their previous earnings. This feature of the program's structure recognizes that lower earners are less likely to have other sources of retirement income and will be relying primarily on Social Security benefits to assure a minimally adequate living standard in retirement. In fact, among elderly households, Social Security accounts for over 80 percent of total family income in the bottom two-fifths of the income distribution.

Notes from this section

1. The University of Michigan Health and Retirement Study surveys more than 22,000 Americans over the age of 50 every two years. Supported by the National Institute on Aging, the study paints an emerging portrait of an aging American's physical and mental health, insurance coverage, financial status, family support systems, labor market status, and retirement planning.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Usage, posting and reprint of materials on the UI web site:

Most publications may be downloaded free of charge from the web site in PDF format. This information may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact paffairs@ui.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.