Social Security is moving toward its day of reckoning. And while the national upheaval might not be the train wreck that health reform has become, it will be a big, big deal. The last time major changes were made to the program was 1983. Efforts then to put Social Security on a sound long-term footing included higher tax rates for payments into the system, raising retirement ages, and treating some Social Security payments as taxable income.
[See Best Affordable Places to Retire.] These fixes generally have endured well. But as you might have noticed, government has trouble saying "No" to much of anything. This inherent bias toward generosity has been slowly eroding the financial footing of Social Security. It's also just hard to anticipate the future. For example, this recession alone will wind up paring years off the program's self-sufficient lifespan. Payments into the system are way off because of high unemployment but benefit expenses are higher. That's because many older employees who suffered job losses were forced to begin taking Social Security as soon as they became eligible at age 62. The soundness of the program is also adversely affected by longevity, and people are living much longer than the experts anticipated even as recently as 1983.
The erosion of Social Security certainly may unsettle current retirees. But its most corrosive impact is on younger employees, most of whom simply don't believe the system will be there to help them retire in 30 or 40 years. This eats away at all sorts of attitudes toward government, and simply must be addressed. This recession also has made it painfully clear that Social Security has become a far more dominant source of retirement income than ever was intended when the program was created in 1935. We can argue all day about why people fail to set aside sufficient retirement funds. But the practical reality is that "fixing" Social Security won't restore expectations of a comfortable retirement without major changes in private retirement saving and investing as well.
Even back in 1983, Congress realized it needed the political cover of an authoritative, non-partisan commission to enact higher Social Security taxes and raise retirement ages. Alan Greenspan headed the 1983 panel. Finding a towering figure to lead such an effort in these times will be challenging. But after the exhausting and abrasive health reform process, expect Congress to once again choose a non-partisan route toward the next round of Social Security changes.
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In the meantime, planning work is underway. U.S. Senator Herb Kohl (D-WI), Chairman of the Senate Special Committee on Aging, asked the U.S. Government Accountability Office (GAO) to review benefit options affecting lower-income beneficiaries, who traditionally are the core focus of the program. This group, and particularly older widows, depends almost exclusively on Social Security. The GAO report reviewed eight areas where, it said, benefit changes were most commonly proposed. The report looked at how effectively each proposal would help lower-income beneficiaries, whether it would have much of a financial impact on Social Security, and on how difficult it would be to administer. Here are summary excerpts of its findings, which will be part of a larger Social Security report due soon from the Kohl committee.
Guaranteeing a Minimum Benefit. Guaranteeing a minimum benefit by increasing Social Security retirement benefits for those who have worked in low-wage jobs throughout their careers addresses concerns about benefit adequacy. One option would provide a minimum benefit equal to 120 percent of the poverty line for a minimum wage earner who had worked for 30 years. Another option would provide a minimum benefit equal to 100 percent of the poverty line for a 30-year worker and 111 percent of the poverty line for a 40-year worker. Social Security Administration officials said that, depending on how this option is designed, it could work well, but it is difficult to target lifetime low earners effectively.
Reducing Work Requirements for Eligibility. Reducing the work requirements for Social Security retirement benefit eligibility enables people who have shorter earnings histories to receive benefits. Agency officials said there are many people who fall just short of the 40 credits requirement [had wage earnings that met program minimums for at least 40 calendar quarters during their working lives] because they have intermittent work histories. However, officials also said many of those people may already be eligible for spousal benefits, resulting in few people benefiting from this option.
Supplementing Benefits for Low-income Single Workers. Supplementing benefits for low-income single workers by adjusting the formula used to calculate Social Security retirement benefits addresses concerns about benefit adequacy for that group. To receive the supplement, a worker must have at least 30 years of covered employment and the worker cannot be eligible for spousal benefits, nor can anyone else claim spousal benefits based on that worker’s earnings record. Low-income single and divorced women are expected to benefit most from this option. While some retirement experts were supportive of this option because it focused on the needs of low-income women, others questioned the rationale for basing eligibility on marital status and said either that eligibility for the supplement should be expanded to a broader group of beneficiaries or that the needs of low-income single women could be addressed through another option, such as a guaranteed minimum benefit.
Adopting Earnings Sharing. Earnings sharing combines married individuals’ annual earnings and evenly divides them between the two spouses for each year of marriage when calculating individuals’ Social Security retirement benefits. Under earnings sharing, divorced spouses whose marriages lasted less than 10 years would be entitled to the individual benefits accrued during the marriage. This option is also seen as a way to equalize benefits received by dual-earner married couples with those of single-earner couples. Currently, a single earner couple receives higher total benefits than a dual-earner couple with the same total lifetime earnings. SSA’s simulations found that benefits would decrease for about 50 percent of divorced women and increase for about 40 percent of divorced women. Benefits would also increase for over one-third of married individuals, but decrease for the vast majority of widow(er)s.
Reducing the Marriage Duration Required for Spousal Benefits. Reducing the marriage duration required for spousal benefits is an option that targets divorced spouses. However, experts also said they do not expect this option to effectively target economically vulnerable groups. This option would not benefit women who were never married but could benefit higher-income women who are not economically vulnerable.
Providing Caregiver Credits. Providing caregiver credits increases benefits for those who spend time out of the workforce to care for dependent children or elderly relatives. Time spent out of covered employment as a caregiver may reduce benefits for workers, and others may not work enough to earn the required 40 credits to be eligible for benefits. One caregiver credit option would allow a specified amount of care giving time, such as three or four years, to count as covered employment, and assign a wage to that time. Another design excludes a limited number of care giving years from the benefit calculation so that instead of averaging earnings over 35 years, earnings are averaged over fewer years. A third design supplements caregivers’ retired worker benefits directly, regardless of whether they took time out of the workforce for care giving. For example, an income-tested supplement could be given to increase retired worker benefits by 75 percent for those who have one child and 80 percent for those with two or more children. Both parents of a child would be eligible for this supplement, as long as the total household income did not exceed 125 percent of the federal poverty line. Retirement security experts said this option recognizes the societal value of care giving, but experts also said that, for various reasons, it may not reach its target population. For example, low-income people are less likely to be able to take time off from work. Therefore, people who have relatively higher incomes may benefit more from the creation of caregiver credits. Retirement security experts and SSA officials told us that caregiver credits would be complex to administer. A key issue is how to verify that care was provided to a qualifying person.
Increasing Survivor Benefits. Increasing benefits for surviving spouses, often widowed women, by providing a Social Security retirement benefit equal to 75 percent of the combined amount the couple received addresses concerns about benefit adequacy. The current benefit structure decreases household income upon widowhood by one-third if the couple’s benefits had been based on one spouse’s work history and up to 50 percent if both spouses had been receiving retired worker benefits. SSA has estimated that one-third of widow(er)s receive lower benefits because of this provision. Retirement security experts and agency officials said this option could address benefit adequacy for a very vulnerable group and would be an improvement over the current system. They also said that this option can be targeted specifically toward low-income survivors, for example, by including a cap. Experts and agency officials also said this option addresses equity concerns by increasing benefits for dual-earner couples. Under the current system, dual-earner couples experience a proportionally greater decrease in benefits upon the death of a spouse than single-earner couples experience. However, as some experts noted, this option would not address benefit adequacy for women who do not qualify for spousal or survivor benefits. Agency officials told us that this option could be complex to administer, in part because it uses a “couple’s benefit” as a baseline for calculating survivor benefits. Since such a benefit does not currently exist in the Social Security system this could be problematic, for example, in cases where one of the spouses dies before retiring. In addition, officials said there are many complicated rules for survivors because of an existing provision, called the widow(er)’s limit, that caps benefit amounts for some survivors.
Providing Longevity Insurance. Providing longevity insurance addresses concerns about benefit adequacy by increasing Social Security retirement benefits for beneficiaries who reach an advanced age, such as 80 or 85. This option could be targeted specifically toward low-income beneficiaries, or provided to all those who reach an advanced age. Work history could be an additional condition for eligibility. For example, one longevity insurance proposal increases benefits for people who have low benefits at age 82 and have at least 20 years of covered employment. It would provide a minimum benefit equal to 70 percent of the federal poverty line for a 20-year worker and increases the benefit for each additional year of work. Another proposal increases benefits by 10 percent at age 85 for 30-year workers whose benefits are lower than 75 percent of the average benefit all workers receive. Retirement security experts told us this could be an effective option for addressing concerns about benefit adequacy for the very old, especially the oldest widows, because women generally live longer than men. However, some experts also said that unless this option is specifically targeted toward low-income beneficiaries, most of the benefits would accrue to higher-income people because they tend to live longer. In addition, agency officials said this option could create disincentives to save for retirement or incentives to spend down resources before beneficiaries become old enough to qualify for the longevity increase. By doing so, those whose assets would be too high to satisfy the means test could become eligible for the increase.