Melissa Favreault, a senior research associate at the Urban Institute's Income and Benefits Policy Center, uses large-scale microsimulation models to analyze wide-ranging Social Security reforms. Most recently, she simulated various ways that a Social Security minimum benefit might be designed to reduce poverty among the vulnerable elderly.
Five Questions Archives
January 6, 2007
1. Does Social Security meet the needs of the modern family?
Social Security is a very popular and successful social program. It has helped dramatically reduce poverty among the elderly in the last several decades. In 1959, more than a third of Americans over age 65 were poor. Now it's about 10 percent of the aged population. The aged are less likely to be poor than those in prime age or than children.
Even though poverty rates for aged Americans have plummeted, the elderly in many other economically comparable countries are better off. Meanwhile, near poverty rates here remain quite high. So even though we've made progress, we don't want to stop and say, "We've taken care of aged poverty." We haven't.
Further, many features of Social Security are anachronistic. For instance, Social Security spousal and survivor benefits are paid in proportion to a worker's earnings—not a spouse's needs. As a result, the nonworking spouse of a high-earning worker can receive larger benefits than a low-earning worker who paid payroll taxes for many years.
Spousal and survivor benefits become an equity issue for single people since they don't receive any. And dual-earner couples may receive far less in lifetime benefits relative to taxes paid than single-earner couples do.
Equity issues are probably even more profound from a generational perspective. The long-term financing problems of both Social Security and Medicare imply significantly higher taxes and lower replacement rates for younger generations and future Americans. The sooner we address these obligations, the more opportunity there will be for sharing the sacrifices equitably across generations. Inaction just passes the costs to our children and grandchildren. That's why it is wise for younger citizens to learn about these issues—and become involved in the political process—even though retirement may seem like it's a long time away for them.
2. Who is vulnerable?
Statistics show that many unmarried women are at high risk in retirement. Most estimates show that never-married women and divorced women are worse off than widows because widow benefits under Social Security are often relatively generous. Still, many widows end up in poverty.
Differences by race, education, and living arrangements are also large. Poverty rates among aged African-Americans and Hispanics are high. Those with no high school degree especially have high poverty rates as they age. Those who live alone face further risk. And poverty rates climb even higher where these characteristics intersect. In 2003, for example, poverty reached about 40 percent for African-American and Hispanic women who were at least 65 and living alone.
Folks with disabilities and serious health problems also can be vulnerable in their later years. Even though many of them qualify for Social Security disability benefits and Medicare, additional health-related expenses can cause economic pressure for some.
Obviously, long-time low-wage workers are particularly vulnerable in retirement. That is clearly a group that needs attention. Many of these workers end up poor in retirement.
3. What changes to the current system have you examined?
Over the years we've examined a very wide array. We've looked at many incremental changes—different forms of benefit reductions, including COLA cuts and increases in the normal retirement age, formula changes, progressive price indexing, caregiver credits, and restructured spousal and survival benefits.
We're mostly looking at cost-neutral changes. That way, a policymaker can see how a fixed amount of money could be redistributed using different approaches and who are winners and losers under each option.
Our dynamic microsimulation model was developed at the Urban Institute starting in the 1970s. DYNASIM3—a major update of the earlier model—can simulate many potential changes to Social Security. For instance, we can estimate the retirement consequences of the recent entry of many low-wage single mothers into the workforce.
One incremental change that's been popular in other countries is caregiver credits. We've looked at substituting all or part of the current spousal benefit for a caregiver credit. That way, the Social Security reward for raising children would not be predicated on marriage—important since over a third of kids in the United States are now born outside of marriage.
As for structural changes, we've revived the debate on earnings sharing, which would treat different types of married couples similarly. If combined with the phase-out of spousal benefits, such proposals would equalize treatment of all couples with the same lifetime earnings. However, earnings sharing proposals raise a lot of challenges, especially with respect to how survivors are treated and how plans would be phased in.
We generally simulate packages of changes rather than just one. Sometimes, boosting equity diminishes benefit adequacy. So it's very hard to deal with the equity problem and deal with the poverty problem simultaneously. Simulating a package of changes makes that easier, and it's really vital that our policy leaders understand these tradeoffs.
One area we've looked at in-depth is the minimum benefit. At this point, Social Security has no broad-based minimum benefit, so we're putting that option on the table.
4. Would a minimum Social Security benefit ease poverty among the elderly?
Minimum benefits can make a dent in elder poverty. Of course, design is important. What is considered a year of work and how many work years are required to receive a minimum benefit, for instance, determine the impact a minimum would have.
Although the minimum has advantages for low-income populations, many Social Security experts don't like the idea. They argue that minimums would make the system significantly more redistributive, which might make higher- and middle-income taxpayers and voters balk.
People who aren't huge advocates of the minimum often think that it's better to handle poverty problems through the Supplemental Security Income program, or SSI. As this policy debate continues, our analysis should help clarify the choices.
We have compared SSI to minimum benefits and found that minimum benefits can better reduce poverty. Research suggests that only about two-thirds of the people eligible for SSI apply for it. Many don't know the application ropes and some feel stigmatized by means-tested assistance like SSI.
5. What are your recommendations for the new Congress?
Think big picture and long term. I hope the new Congress looks at the fiscal shortfalls in Social Security together with the problems caused by demographic change. Baby boomers are about to retire big time and the Social Security and Medicare costs are going to skyrocket.
The fiscal crisis gives us an opportunity to do some big-picture thinking about restructuring Social Security. It's time to step back and consider how to make Social Security more equitable for today's families and future generations.
Also bear in mind how much the income and earnings distribution have been shifting in the past several years. We've seen disproportionate growth of wages and income among top earners and stagnation elsewhere. Not everyone is sharing in the country's increased prosperity. Some Social Security reforms would protect lower- and middle-income earners better than others.
It's surprising how quickly the debate on private accounts has shifted. A couple decades ago, this was a fringe idea. Now it's mainstream, with loads of attention. One reason that some of the high-profile personal account plans advanced in the past couple years have failed was worry about how to finance them. Many would have required massive transfers from general revenues at a time when the government is about to be saddled with baby boomer retirement costs.
Legislators hoping to move forward personal accounts should devise plans in which financing is completely transparent. In the coming year, add-on accounts—distinct from accounts carved out of regular benefits—might receive more attention than they have in the recent past. With add-on accounts, base benefits would be secure, but more retirees would have savings to augment their basic benefits.
Personal account proposals raise other issues—such as the size of administrative costs, what happens to account balances when spouses divorce and/or remarry, and whether retirees should be required to convert account balances into guaranteed income streams (rather than being allowed to take them as lump sums).
At UI, we've tried to expand the debate, saying that Social Security reform is not just about private accounts. The debate should be about what's the best system. Whether we integrate private accounts or not, we still have to face these family structure issues, including poverty among subgroups of the aged population, and fiscal pressures created by the retirement of the baby boom.
Latest Research
Browse by Topic:
