A New Minimum Benefit for Low Lifetime Earners

Abstract

Despite working hard and playing by the rules over long periods, many workers end up poor in retirement. We propose an enhanced minimum benefit for Social Security that targets long-career workers with low lifetime earnings along with a modest credit that compensates workers for up to three years out of the labor market due to caregiving, unemployment, or poor health. By combining these elements, the proposal provides work incentives, yet recognizes realities facing low-wage workers, many of whom have had intermittent work careers. We show that these proposed enhancements would allow more adults to retire with a secure financial foothold.

Executive Summary

Despite working hard and playing by the rules over long periods, many workers end up poor in retirement. We propose a new, enhanced minimum benefit for Social Security that targets workers with long careers with low lifetime earnings along with a modest credit that compensates workers for up to three years out of the labor market due to caregiving, unemployment, or poor health. Combining these two elements means that the proposal provides work incentives, yet also recognizes the realities facing low-wage workers, many of whom have had intermittent work careers.

The generosity of the proposed minimum benefit varies based on the total number of years that an individual has worked in Social Security-covered employment (with a year defined as four quarters of coverage). It starts at 60 percent of the poverty threshold for a worker with twenty years of Social Security-covered earnings, the minimum required work years to receive a boost from the minimum, and increases to a maximum of 110 percent of poverty for those working 40 or more years. The caregiving and health credits, which are based on the average wage, count toward the work years required by the minimum benefit. We prorate the number of credits for which one is eligible based on time of residence in the United States (for immigrants) and time of disability onset (for those who qualify for disabled worker benefits). We present both wage- and price-indexed versions of the minimum benefits, and also contrast our base minimum benefit with an alternative that starts at a lower benefit level but increases faster with each additional year of service. The proposed change takes effect for those first qualifying for benefits in 2010 and later.

We show that these proposed enhancements to Social Security would allow more adults to retire with a secure financial foothold. To demonstrate the plan's potential effectiveness, we present results from simulations of several versions of the proposal using DYNASIM, the Urban Institute's dynamic microsimulation model of the U.S. population. These results suggest that the proposal could help to remove hundreds of thousands of American workers from poverty at relatively modest cost. Fractions of benefits directed to less educated workers and workers who raised children outside of marriage increase under all parameterizations of the reform.

We then consider alternative ways of financing the credits and the minimum benefits. We find that relatively modest reductions to current law spouse benefits could on their own finance the caregiver credit. When combined with disability credits and a minimum benefit, the caregiver credits become more costly, especially if the minimum benefit is wage-indexed. Deeper cuts in the spouse benefit could offset these increased costs, as could modest increases in the Social Security wage and benefit base (the "taxable maximum"). When the minimum benefit and care credits are financed, the tradeoffs associated with their introduction become more obvious. These tradeoffs include reduced returns to payroll tax contributions for moderate- and high-earners, especially those who have more education or, in some cases, longer earnings histories.

Of course, the larger context in which we propose these changes is one of serious financial challenge for the Social Security system. We thus recommend further, more rigorous analyses to optimize the proposal components so that they maximize the overall poverty reduction effect while minimizing any work disincentives.

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