Wednesday, January 20, 2010

U.S. News: 8 Possible Changes to Social Security Benefits

U.S. News & World Report's Philip Moeller reports on potential benefit changes that could improve treatment for low earners under Social Security, discussed in a recent GAO report. Here's the short list with some of my comments on each – you'll have to read the article for the details (which are good).

  • Guaranteeing a Minimum Benefit.
    • Most benefit guarantees, for instance, don't do a heck of a lot because not many people are eligible. The problem for an earnings-based system like Social Security is that as you move to ensure a minimum income for truly low earners you end up shifting much closer to a "welfare program" that breaks the earnings-benefit link. That already occurs to some degree already through Social Security's progressivity, but to reach the truly poor in retirement you have to target people with very spotty work records. That's a tricky path, both in policy and political terms.
  • Reducing Work Requirements for Eligibility.
    • I wrote on this subject for NASI last year and was a bit disappointed in the results. There aren't a ton of non-immigrants who benefit from reducing the current 10-year work requirement to qualify for retirement benefits. I'm all for lowering the work requirement, since this doesn't result in any sort of giveaway since Social Security doesn't really have a minimum benefit, but I don't think it will produce all that much.
  • Supplementing Benefits for Low-income Single Workers.
    • I'd rather reduce spousal benefits, which are an unearned (and often unneeded) subsidy for married couples, then use the savings to boost benefits overall at the low end. We need less complexity rather than more.
  • Adopting Earnings Sharing.
    • I'm very interested in this idea, in which total household earnings would be split evenly between spouses each year for the purposes of calculating their future benefits. I've not seen it modeled very closely, so there may be some things that I haven't thought about, but in the big picture the household is the relevant unit so I think that's what we should be looking at.
  • Reducing the Marriage Duration Required for Spousal Benefits.
    • I ran some numbers a few years ago on lowering the current 10-year marriage requirement to be eligible for divorced spouse benefits and it seemed like a cheap but pretty well targeted reform; that is, it increased benefits principally for people with very low lifetime earnings. Since the typical divorce takes place before 10 years of marriage this might make sense, although I'd probably prefer something like earnings sharing.
  • Providing Caregiver Credits.
    • I've read differing accounts of how well caregiver credits would work; one problem is that low-income people have to work and can't afford to stay home, so the targeting may not be great unless it's limited to low earners. It would also weaken the earnings-benefits link, although it's often pretty weak in any case.
  • Increasing Survivor Benefits.
    • When one spouse dies total household Social Security benefits are reduced by one-third to one-half, depending on the distribution of benefits between spouses. Using a standard approach for calculating efficiencies of scale in household size, a household of one has costs equal to around 63% of a household of two. A benefit reduction of one-third may be ok, but one-half seems too much.
  • Providing Longevity Insurance.
    • Social Security already provides significant longevity insurance, particularly for low earners who derive most of their retirement income from the program, but higher earners may desire more. Increasing benefits later in life might help compensate for the fact that most non-Social Security sources of income aren't indexed to inflation and thereby help smooth income better over the course of retirement.

I'm ok on pretty much all of these, at least in some form, although some would work better than others.

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