Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Retirement Planning > Social Security

Social Security reform offers plenty to fight about

Your article was successfully shared with the contacts you provided.

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.

Also read: Towers Watson report challenges retirement ‘crisis’

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.

A different COLA calculation

Cost-of-living adjustments to Social Security are currently adjusted using the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W. The legislation authored by Sens. Brown and Harkin – The Strengthening Social Security Act – would replace this index with the Consumer Price Index for Elderly Consumers, or the CPI-E.

That index tracks goods and weighs them relative to the consumption habits of older Americans. That could lead to greater increases in benefits that account for rising costs of health care, which affect Social Security beneficiaries more than their younger counterparts.

Survivor benefits

According to the Urban Institute, nearly a fifth of all adult Social Security benefits go to the spouses and survivors of retired, disabled or deceased workers. Currently, spouses can receive up to a half of their husband or wife’s benefits when they are alive, and all of them when they die.

Critics say the current system is antiquated, based on a time when fewer people divorced, and fewer women worked. Benefits are therefore determined by marital histories, not need. Moreover, spouses of high earners receive large benefits, sometimes larger than the actual salaries of some workers.

Also read: Rubio backs higher retirement age

As Fichtner noted, lawmakers may want to consider gradually limiting the growth of nonworking spouse benefits associated with higher earners. 

The nonworking spouse benefit is both “regressive and a significant disincentive to paid employment,” he said. “A two-earner couple both with low wages receives lower returns from Social Security than a high-wage one-earner couple, despite the intended progressivity of the basic benefit formula,” he said. 

“Additionally, someone married to a high-earning spouse might well receive a higher nonworking spouse benefit than another individual might earn based on a full career of paying payroll taxes on modest annual earnings.”

Fichtner didn’t advocate eliminating the nonworking spouse benefit. Instead, he suggested constraining its growth “so that no future nonworking spouse can receive a benefit exceeding the inflation-adjusted value of the benefits that today’s low-wage workers receive based on a full career of payroll tax contributions.” 

Updating SSI

Created in 1972, the Supplemental Security Income program gives monthly cash assistance to disabled, blind or elderly Americans with minimal income and assets. As of December, nearly 8.4 million people collected SSI benefits. SSI is the only income for three-fifths of its recipients, according to the Center on Budget and Policy Priorities.

The SSI benefit was increased this past January, providing $721 a month to individuals with no more than $2,000 in assets, and $1,082 to couples with no more than $3,000.

SSI cost taxpayers about $50 billion in fiscal 2012, and has been successful in reducing the aggregate poverty gap by up to two-thirds in recent years. Yet more than two-fifths of SSI recipients live in families with incomes below the poverty line. Critics of the program say many elderly and disabled don’t qualify.

Reform proposals include raising the SSI benefits to the poverty level, which would mean an increase from $721 to $973 for individuals and $1,082 to $1,311 for couples. Other ideas are to update the asset limits for eligibility, which were last changed in 1989, and updating the limits on other income.

Caregiver credits and paid family leave

Expanding Social Security is also on some lawmakers’ minds. 

The country’s aging population base invariably means that more family members — either spouses or adult children of the elderly — will become primary caregivers going forward.

In many cases, caregiving will become a full-time responsibility, pushing earners out of the workforce, potentially in their peak earning years. Family caregivers reduce taxpayer burden to Medicaid and Medicare. Yet, as it stands, access to benefits for caregivers is limited.

Proponents of extending Social Security to family caregivers argue that clearer channels for benefits going forward could actually offset long-term care costs that are expected to swell as baby boomers age into their golden years.

Who’s on the subcommittee

Chairman: Sherrod Brown, Ohio, Democrat 

Democrats: John D. Rockefeller IV, W.V.; Charles E. Schumer, N.Y.; Bill Nelson, Fla.; Benjamin L. Cardin, Md.; Patrick J. Toomey, Pa. 

Republicans: Mike Crapo, Idaho; Johnny Isakson, Ga.; Rob Portman, Ohio



© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.