Sunday, April 20, 2008

New paper: CRS on How the Poor May Be Affected by Social Security Reform

The Congressional Research Service released "Social Security Reform: Possible Effects on the Elderly Poor and Mitigation Options," by Kathleen Romig.

The executive summary:

Social Security has significantly reduced elderly poverty. The elderly poverty rate has fallen from 35% in 1959 to an all-time low of 9% in 2006, in large part because of Social Security. If Social Security benefits did not exist, an estimated 44% the elderly would be poor today assuming no changes in behavior. The Supplemental Security Income (SSI) program, also provides benefits to the poorest elderly, many of whom do not qualify for Social Security benefits. However, despite these programs, about 3.4 million elderly individuals remained in poverty in 2006.

The Social Security system faces a long-term financing problem. The Social Security Trustees project cash-flow deficits beginning in 2017 and trust fund insolvency in 2041. Many recent proposals to improve system solvency would reduce Social Security benefits in the future. Benefit reductions could affect the low income elderly, many of whom rely on Social Security benefits for almost all of their income. Such potential benefit reductions could lead to higher rates of poverty among the elderly compared to those projected under the current benefit formula. Because the low-income elderly are especially vulnerable to benefit reductions, many recent Social Security reform proposals have included minimum benefits or other provisions that would mitigate the effect of benefit cuts on the elderly poor.

This report analyzes the projected effects of four possible approaches to mitigating the effects of Social Security benefit reductions on elderly poverty in 2042, the first full year of projected trust fund insolvency. The options are compared to a payable baseline, which assumes current-law benefits would need to be cut across the board to balance Social Security's annual income and spending at the point of insolvency. The four options examined are (1) a poverty-line Social Security minimum benefit; (2) a sliding-scale Social Security minimum benefit; (3) a poverty line SSI benefit; and (4) a poverty-line SSI benefit with liberalized eligibility.

Major findings include the following:

  • Each of the four options would reduce elderly poverty compared to the payable baseline — ranging from a negligible reduction in the elderly poverty rate for the option to create a sliding-scale Social Security minimum benefit to a reduction of three percentage points for the poverty-line SSI benefit with liberalized eligibility.
  • The elderly poverty rate under all of the options would be higher than under the current law scheduled baseline, which assumes the current benefit formula can be maintained with no reductions.
  • The SSI options examined would target the additional spending more efficiently toward the poor elderly than would the Social Security options.
  • The Social Security options examined would reduce the incomes of some elderly because of interaction effects; the SSI options would not create such interactions.

My comments:

One quibble: I'm really not keen on is this comparison: "If Social Security benefits did not exist, an estimated 44% the elderly would be poor today, assuming no behavioral changes such as saving more or working longer." Well, yes. But lacking Social Security benefits – and presumably the taxes needed to fund them – households would have both the incentive and the means to save more. And the Social Security benefit formula imposes significant net taxes on individuals who continue working, so we can also assume people would also work longer. In other words, these are very large assumptions to attach to a headline that can easily be misused in a policy debate.

Beyond that quibble, however, this paper shows the importance of having a detailed model of the population and of government programs. Without these, it is near-impossible to know who the "poor" are – e.g., do they tend to have low earnings over long periods, or more moderate earnings coupled with time out of the workforce? – and how changes to Social Security benefits may cause interactions with other programs like SSI. Overall this is a very helpful addition to the menu of policy options available to policymakers.





Anonymous said...

it is dishonest to talk about trust fund "insolvency."

the trust fund is not Social Security. it will run out of money about the same time as it runs out of Baby Boomers to pay benefits to... as it was designed to do.

the choices offered here are also dishonest: why would any sane person choose to cut his future benefits by 240 dollars per month out of a projected benefit of 1000 per month to be reduced to 760, if he could keep those benfits by saving, via the "tax", an extra sixty dollars a month out of a pay of about 3000 per month.

your inability to figure out in advance just who the poor would be, or what they would do with their money in the absence of SS, is just the problem we all have.

but the world of woulda shoulda coulda is so much more promising to the theorist than what has actually happened since SS was introduced.

shoffy22 said...

Woohoo! Thanks for the heads up about this paper - it looks really interesting and indeed it looks like it will be a good addition to the literature on reform options. right on!

rdan said...

You are more than welcome to have Brooks comment here if you need more readers at the moment. Glad you stopped by. We have started some really interesting series.

Andrew G. Biggs said...

Much appreciated.