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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New paper: “Marital History, Race, and Social Security Spouse and Widow Benefit Eligibility in the United States”

SSRN turns up a new paper, "Marital History, Race, and Social Security Spouse and Widow Benefit Eligibility in the United States," by Christopher R. Tamborini, Howard Iams and Kevin Whitman, all of the Social Security Administration. Here's the abstract:

Large-scale changes in American family structures over the past decades have important implications for the retirement experiences of women. In this study, the authors use a restricted-use file of the Marital History Module of the U.S. Census Bureau's Survey of Income and Program Participation to investigate changes in the marital histories of women aged 40 to 69 years between 1990 and 2004, with a focus on outcomes relevant for Social Security spouse and widow benefit eligibility. Multinomial and binary logistic regression analyses show significant changes in women's marital patterns since 1990, with more substantial shifts occurring among recent cohorts. Due to downward trends in marriage, the authors find a modest decline in Social Security spouse and widow benefit eligibility in 2004, particularly among Black women born toward the end of the baby boom generation.

This made me think of two things: first, about the only way to get a truly good return from Social Security going forward is for one member of a household to receive spousal benefits; but second, changes in marital patterns by race could mean that spousal benefits become predominantly for white people. I prepared the chart below from Census data a few years ago and so the data isn't completely up to date, but the changes in black/white marriage rates since the 1950s are pretty extreme.

Back in 1950 blacks had roughly the same marriage rate as whites, but since then patterns have sharply diverged. In 2000 around 25 percent of whites over age 15 had never been married, which is only a few percentage points higher than the 1950 level. But around 44 percent of blacks had never been married in 2000, compared to only around 25 percent in 1950. As a result, fewer and fewer black retirees in the future will tend to be eligible for spousal benefits.

I'm not a huge fan of Social Security's spouse benefits, which seem to reward neither contributions nor need, and – as I'll point out in Friday's sure-to-be-fantastic AEI panel on Social Security's effect on work incentives – impose high marginal tax rates on women's labor. But these racial disparities might be another reason to give spousal benefits the heave-ho.

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Testimony and video from Senate Aging Committee hearing on Social Security reform

Yesterday the Senate Aging Committee held a hearing on Social Security reform, with an emphasis on changes that could improve benefit adequacy for vulnerable populations. Following are the statements of the Chair and Ranking Member, then witness testimony:

Statements of Committee Members

• Senator Herb Kohl (D-WI), Chairman
  
• Senator Mel Martinez (R-FL), Ranking Member
  
  

Witness Testimony

• Leon Burzynski,, President, Wisconsin Alliance for Retired Americans, Pewaukee, WI
  
• Kenneth Apfel, Professor of the Practice, School of Public Policy, University of Maryland, College Park, MD
  
• Joan Entmacher, Vice President for Family Economic Security, National Women's Law Center, Washington, DC
  
• Melissa Favreault, Senior Research Associate, Income and Benefits Policy Center, Urban Institute, Washington, DC
  
• John Irons, Research and Policy Director, Economic Policy Institute, Washington, DC
  
• Andrew Biggs, Resident Scholar, American Enterprise Institute, Washington, DC

Click here for video of the hearing.

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New Paper: “Are There Opportunities to Increase Social Security Progressivity despite Underfunding?”

The Tax Policy Center has released a new paper by the Urban Institute's Melissa Favreault and Gordon Mermin titled "Are There Opportunities to Increase Social Security Progressivity despite Underfunding?" Here's the abstract:

This paper reviews why Social Security fails to lift more aged low-wage workers and people of color out of poverty. It examines the payroll tax and benefit formula and reviews literature about OASDI outcomes by race, gender, and earnings level. It describes how mortality, earnings, disability, childbearing, immigration and emigration, and marriage patterns all differ across U.S. racial/ethnic groups, and highlights the importance of these differences for program outcomes. The paper then uses the DYNASIM model to examine lifetime OASDI redistribution under current law and a trust fund-neutral reform package that would enhance system progressivity and improve outcomes for some vulnerable to retirement poverty.

In addition to being a good summary of existing research on who does well and who does poorly under Social Security – and why – Favreault and Mermin present a number of potential reforms to Social Security to reduce poverty among seniors. Definitely worth a read.

Here's my quick take, based on forthcoming work for AEI: while Favreault and Mermin's paper is very good, the emphasis on whether Social Security should be more or less progressive actually misses the point a bit. The problem Social Security faces is that it isn't consistently progressive, meaning that there is too much disparity in treatment among people with the same lifetime earnings. Poor people get higher average replacement rates than higher income people, but that average hides a lot of disparity: many poor folks do really well, but a lot also do pretty poorly. The reason, as Favreault and Mermin point out, is that Social Security redistributes based on a lot of factors other than the person's lifetime earnings. (E.g., length of marriage, relative earnings between spouses, length of working career, etc.)

The chart below illustrates. As can be seen, average replacement rates decline as lifetime earnings increase – this shows that Social Security is generally progressive. However, the distribution of replacement rates at any given level of lifetime earnings can be pretty wide, especially for low earners. Some do really well, others do pretty poorly.

If Social Security is to be successful as social insurance, it needs to pay off consistently. There are a number of ways, including those discussed by Favreault and Mermin, to improve the targeting of Social Security benefits by earnings level. If Social Security's progressivity were better targeted, the same amount of average progressivity could produce better protections for low earners in old age.

Update: An anonymous commenter asks, "The problem you note may be related to the disparate way benefit formulas apply to couples in general. The chart would probably look more equitable for wage earners only. Is the way we treat couples still as relevant as it was in the 1930's?"

It's a logical point but turns out not to be the case. Social Security benefits are better targeted at a household level than an individual level. The chart below differs a bit from the one above (it shows data points rather than interquartile ranges), but the dispersion in replacement rates by lifetime earnings is significantly higher at the individual than the household level.

One way to look at is to measure the R-squared values of a regression of replacement rates on lifetime earnings. At the household level the R-squared value is around 0.55, which indicates that around 55% of differences in replacement rates can be accounted for by differences in lifetime earnings. (Given that Social Security is designed to redistribute by lifetime eranings, this strikes me as a lower value than you'd want.) At the individual level, however, the R-squared is only around 0.3; this indicates that 70 percent of differences in replacement rates between indivduals are due to things other than differences in their lifetime eranings. This again strikes me as very haphazard given that we're trying to target low earners.

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Kudlow on the Cap

Larry Kudlow comments on Barack Obama's plan to increase the Social Security payroll tax cap:

Uncapping the payroll tax reveals still another cultural misstep by Sen. Obama. He apparently has a difficult time understanding that nowadays, a veteran fireman or a veteran cop, married to a veteran schoolteacher, will make well over $100,000. In fact, they can make close to $200,000. Yet Obama still wants to go ahead and tax both the first and last payroll dollar of this group at a very high marginal tax rate by uncapping the Social Security (FICA) tax.

A couple thoughts:

First, in fairness to Obama, he has said that while he would eliminate the payroll tax cap, we would create a "donut hole" exempting earnings between $100,000 and $200-$250,000. So while he was challenged in the Philadelphia debate that his Social Security plan would raise taxes on individuals earning under $250,000, his Social Security plan would not do so. (Whether he could sustain the exemption is another story.)

Second, Kudlow implies that payroll taxes are levied on the combined income of a married couple, as ordinary income taxes are. In fact, both Social Security and Medicare taxes are paid on a purely individual basis. This can lead to inequities, of course: households with the same earnings may pay different taxes depending on how the earnings are distributed between spouses.

Under current law, for instance, a couple would MUCH rather have a single spouse earning $200,000 than both spouses earnings $100,000 each. Why? On the tax end, the single earner couple would pay 6.2% of their joint $200,000 earnings in Social Security taxes, while the dual-earner couple would pay 12.4%. Moreover, at retirement the non-working spouse in the single earner couple would be eligible to a spousal benefit equal to half the working spouse's. So the single-earner couple pays half the taxes of the dual-earner couple, despite having the same earnings, and receives 3/4 of the benefits. In other words, the single earner couple receives 50% more benefits for its tax dollar than the dual-earner couple. Just another example of quirky redistribution under the Social Security tax/benefit formula...


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