Changing the benefit formula. Updating the COLA. Providing caregiver credits.
All of these notions are apparently on the table, at least for the moment, as the Senate Finance Subcommittee on Social Security, Pensions and Family Policy digs into how best to ensure the solvency of Social Security.
Social Security is financed through two trust funds, the Old Age and Survivors Insurance program and the Disability Insurance program. The latter is expected to be insolvent as soon as 2016. The quick fix would be to shift funds from one fund to the other. That, of course, is just a temporary fix.
As part of its work, the subcommittee held a hearing May 21, taking testimony from several industry experts who offered insights into a mix of proposals aimed at shoring up Social Security.
Whether any of these ideas stick remains to be seen. But the statistics are familiar to many. Massive demographic changes threaten Social Security’s solvency. Nearly 20 percent of the population will be of retirement age by 2030, compared with 12.4 percent in 2000.
Stephen C. Goss, chief actuary of the Social Security Administration, set the tone at the hearing when he noted that unless the right changes are made, benefit levels will have to be cut by about 25 percent or revenue somehow boosted by 33 percent.
The subcommittee chairman, Sen. Sherrod Brown, D-Ohio, introduced legislation last year, co-authored by Sen. Tom Harkin, D-Iowa, that includes some of the above-mentioned changes. What follows is a closer look at those, and a few more.
New ways to save
Dr. Teresa Ghilarducci, chair of the Economics Department at the New School for Social Research in New York, urged the lawmakers to consider the creation of a “Guaranteed Retirement Account” or what are known as Secure Choice Accounts now being established in five states and being considered by five more.
A guaranteed retirement account would have everyone saving in a retirement fund much in the way they do in many other countries, including Australia, she said. GRAs would not allow pre-retirement withdrawals. Only partial withdrawals would be allowed. “We are the only country that allows people to take tax preferred money for retirement before retirement,” Ghilarducci noted.
Changing the benefit formula
This is an idea that pops up with practically every discussion about how to save Social Security and it’s something Brown wants done particularly for low-income workers.
Testifying at the hearing, Dr. Jason J. Fichtner, a senior research fellow at the Mercatus Center at George Mason University in Arlington, Virginia, spoke of redesigning the basic benefit formula so that it operates on each separate year of work rather than on one’s career average earnings.
The current formula often “mistakes intermittent high-wage earners for low-wage earners because their career ‘average earnings’ look the same,” Fichtner said in his prepared remarks.
“This confusion causes problems in the treatment of those who move in and out of Social Security coverage — for example, higher-wage state and local employees and immigrants, whom the formula mistakes for needy low-wage workers — necessitating complex fixes such as the Windfall Elimination Provision and the Government Pension Offset.
“Such controversial complexities would become unnecessary if Social Security simply accrued proportional benefits with each additional year of taxpaying work, since all intermittent workers would be treated the same, more in the fashion of a traditional private-sector pension.”
Increasing the early retirement penalty and delayed retirement credit
Raising Social Security’s penalty for early retirement as well as the delayed retirement credit both deserve consideration, Fichtner said.
The current penalty for early retirement is a 25 percent reduction in annual benefits for those who retire at 62. On the other hand, the delayed retirement credit is an 8 percent increase in annual benefits for each year (up to age 70) claims are delayed beyond 66.
For someone delaying claiming benefits until age 70, this credit amounts to a 32 percent increase in the monthly benefit.
No one has said just how much of an adjustment should be made in either the penalty or credit.
There’s also the option of offering the credit as a lump-sum option, a move that could potentially provide people with an added incentive to continue working, without adding any costs to the system.
Raising the early eligibility age
Research has estimated that boosting the eligibility age to 65 from 62 would increase long-run GDP by 3-4 percent.
Fichtner told the subcommittee to keep in mind that shifting the eligibility age to 65 would “merely bring the age of earliest eligibility to what it was at the program’s inception; it would not begin to adjust for the substantial health and longevity gains since. “Period life expectancy” at birth has grown by more than 14 years since 1940, while life expectancy at 65 has grown by more than six years.
On the other hand, boosting the eligibility age would likely reduce poverty among seniors, as they would be subject to an early retirement penalty. Some of the risk of old-age poverty resides with seniors who retire early, have “too low” an annual benefit, and then outlive their other savings.