Dec. 3, 2010 – Most of the initial reactions to the
proposal on December 1 by President Obama’s special committee seeking
ways to reduce the U.S. deficit focused on changes to Medicare as being
the most dramatic of the adjustments recommended. Medicare, no doubt, is
critical to senior citizens but the program closer to the hearts of
millions of seniors is Social Security – the security blanket. The
committee’s report does urge drastic changes in this program to and says
unless the nation acts the booming number elderly will “bring the Social
Security program to its knees.”
“Social Security is far more than just a retirement
program – it is the keystone of the American social safety net, and it
must be protected,” the committee reports says. This draft of proposals,
“The Moment of Truth” by the National
Commission on Fiscal Responsibility and Reform, is to be voted on today.
The panel
co-chairmen, former Wyoming GOP Sen. Alan Simpson and former Clinton
White House Chief of Staff Erskine Bowles, did say they appear to lack
enough votes to win the necessary super-majority backing for their
nearly $4 trillion deficit-reduction plan,
according to
The Fiscal Times. There are 18 members of the committee.
“Social Security is the foundation of economic
security for millions of Americans. More than 50 million Americans –
living in about one in four households – receive Social Security
benefits, with about 70 percent going to retired workers and families,
and the rest going to disabled workers and survivors of deceased
workers,” according to the Social Security section of the report.
Below, in this news report are all of the proposals
by the deficit committee pertaining to changes in Social Security.
The severity of the problem for the program is the
growth in older Americans that received benefits. “When Franklin
Roosevelt signed Social Security into law, average life expectancy was
64 and the earliest retirement age in Social Security was 65. Today,
Americans on average live 14 years longer, retire three years earlier,
and spend 20 years in retirement. In 1950, there were 16 workers per
beneficiary; in 1960, there were 5 workers per beneficiary. Today, the
ratio is 3:1 – and by 2025, there will be just 2.3 workers “paying in”
per beneficiary,” the report says.
“Without action, the benefits currently pledged
under Social Security are a promise we cannot keep. Today, the program
is spending more on beneficiaries than it is collecting in revenue.
Although the system’s revenues and expenditures are expected to return
to balance temporarily in 2012, it will begin running deficits again in
2015 if interest from the trust fund is excluded and in 2025 including
interest payments. After that point, the system’s trust fund will be
drawn down until it is fully exhausted in 2037.
Click graph to see larger view of
committee projections of current trends and after changes.
“Unfortunately, the default plan in Washington is
to do nothing. The do-nothing plan would lead to an immediate 22 percent
across-the-board benefit cut for all current and future beneficiaries in
2037. Over the next 75 years, the program faces a shortfall equal to
1.92 percent of taxable payroll. Seventy-five years from now, that gap
will increase to 4.12 percent of payroll.
“The Commission proposes a balanced plan that
eliminates the 75-year Social Security shortfall and puts the program on
a sustainable path thereafter. To save Social Security for the long
haul, all of us must do our part. The most fortunate will have to
contribute the most, by taking lower benefits than scheduled and paying
more in payroll taxes. Middle-income earners who are able to work will
need to do so a little longer. At the same time, Social Security must do
more to reduce poverty among the very poor and very old who need help
the most.”
Following are each of the Social Security
recommendations.
RECOMMENDATION 5.1: MAKE RETIREMENT BENEFIT FORMULA
MORE PROGRESSIVE. Modify the current three-bracket formula to a more progressive
four-bracket formula, with changes phased in slowly. Change the current
bend point factors of 90%|32%|15% to 90%|30%|10%|5% by 2050, with the
new bend point added at median lifetime income.
In order to control costs, the Commission proposes
gradually moving to a more progressive benefit formula that slows future
benefit growth, particularly for higher earners. Currently, initial
benefits are calculated using a progressive three-bracket formula that
offers individuals 90 percent of their first $9,000 of (wage-indexed)
average lifetime income, 32 percent of their next $55,000, and 15
percent of their remaining income, up to the taxable maximum. The
Commission recommends gradually transitioning to a four-bracket formula
by breaking the middle bracket in two at the median income level
($38,000 in 2010, $63,000 in 2050), and then gradually changing the
replacement rates from 90 percent, 32 percent, and 15 percent to 90
percent, 30 percent, 10 percent, and 5 percent.
This benefit formula change will be phased in very
slowly, beginning in 2017 and not fully phasing in until 2050. Because
all bend point factors will continue to be wage-indexed, future
beneficiaries will continue to have inflation-adjusted benefits larger
than those received by equivalent beneficiaries today.
The plan
has six major components
1) Discretionary Spending Cuts: Enact
tough discretionary spending caps to force budget discipline in
Congress. Include enforcement mechanisms to give the limits real
teeth. Make significant cuts in both security and non-security
spending by cutting low-priority programs and streamlining
government operations. Offer over $50 billion in immediate cuts
to lead by example, and provide $200 billion in illustrative
2015 savings.
2) Comprehensive Tax Reform: Sharply reduce
rates, broaden the base, simplify the tax code, and reduce the
deficit by reducing the many “tax expenditures”—another name for
spending through the tax code. Reform corporate taxes to make
America more competitive, and cap revenue to avoid excessive
taxation.
3) Health Care Cost Containment: Replace
the phantom savings from scheduled Medicare reimbursement cuts
that will never materialize and from a new long-term care
program that is unsustainable with real, common-sense reforms to
physician payments, cost-sharing, malpractice law, prescription
drug costs, government-subsidized medical education, and other
sources. Institute additional long-term measures to bring down
spending growth.
4) Mandatory Savings: Cut
agriculture subsidies and modernize military and civil service
retirement systems, while reforming student loan programs and
putting the Pension Benefit Guarantee Corporation on a
sustainable path.
5) Social Security Reforms to Ensure Long-Term
Solvency and Reduce Poverty: Ensure
sustainable solvency for the next 75 years while reducing
poverty among seniors. Reform Social Security for its own sake,
and not for deficit reduction.
6) Process Changes: Reform the
budget process to ensure the debt remains on a stable path,
spending stays under control, inflation is measured accurately,
and taxpayer dollars go where they belong.
RECOMMENDATION 5.2: REDUCE POVERTY BY PROVIDING
AN ENHANCED MINIMUM BENEFIT FOR LOW-WAGE WORKERS.
Create a new special minimum benefit that provides full career workers
with a benefit no less than 125 percent of the poverty line in 2017 and
indexed to wages thereafter.
Social Security reform must ensure that the program
can continue to meet its basic mission: to prevent people who can no
longer work from falling into poverty. The Commission recommends
creating a new special minimum benefit which provides full-career
(30-year) minimum wage workers with a benefit equivalent to 125 percent
of the poverty line in 2017 and wage-indexed thereafter. The minimum
benefit would phase down proportionally for workers with less than 30
but more than 10 years of earnings.
RECOMMENDATION 5.3: ENHANCE BENEFITS FOR THE
VERY OLD AND THE LONG-TIME DISABLED.
Add a new “20-year benefit bump up” to protect those Social Security
recipients who have potentially outlived their personal retirement
resources.
The oldest old population – those over age 85 – is
projected to expand rapidly over the coming decades: from 5.8 million
this year to 19 million in 2050. To better insure against the risk of
outliving one’s own retirement resources, the Commission proposes a new
“20-year benefit bump-up” that offers a benefit enhancement, equal to 5
percent of the average benefit, 20 years after eligibility. The
enhancement is phased in over five years (1 percent per year).
Eligibility is defined by the earliest eligibility age (EEA) for
retirees and the determination of disability for disabled workers.
RECOMMENDATION 5.4: GRADUALLY INCREASE EARLY AND
FULL RETIREMENT AGES, BASED ON INCREASES IN LIFE EXPECTANCY.
After the Normal Retirement Age (NRA) reaches 67 in 2027 under current
law, index both the NRA and Early Eligibility Age (EEA) to increases in
life expectancy, effectively increasing the NRA to 68 by about 2050 and
69 by about 2075, and the EEA to 63 and 64 in lock step.
To account for increasing life expectancy, the
Commission recommends indexing the retirement age to gains in longevity.
The effect of this is roughly equivalent to adjusting the retirement
ages by one month every two years after the NRA reaches age 67 under
current law. At this pace, the NRA would reach 68 in about 2050, and 69
in about 2075; the Early Eligibility Age (EEA) would increase to 63 and
64 in step.
This approach would also maintain a constant ratio
of years in retirement to years in adulthood; as life expectancy grows
by one year, individuals will still be able to spend an additional 4
months in retirement, as compared to today.
RECOMMENDATION 5.5: GIVE RETIREES MORE
FLEXIBILITY IN CLAIMING BENEFITS AND CREATE A HARDSHIP EXEMPTION FOR
THOSE WHO CANNOT WORK BEYOND 62.
Allow Social Security beneficiaries to collect half of their benefits as
early as age 62, and the other half at a later age. Also, direct the
Social Security Administration to design a hardship exemption for those
who cannot work past 62 but who do not qualify for disability benefits.
As workers approach retirement, they are faced with
varying needs, and different retirement patterns make sense for
different workers and their families. In recognition of these diverse
experiences, the Commission’s proposal introduces significant new
flexibilities and protections in addition to an indexed retirement age.
First, the Commission proposes allowing
beneficiaries to collect up to half of their benefits as early as age
62, with applicable actuarial reduction, and the other half at a later
age (therefore incurring a smaller actuarial reduction). This increased
flexibility should provide for a smoother transition for those
interested in phased retirement, or for households where one member has
retired and another continues to work.
Second, we propose a hardship exemption for
those who may not qualify for disability benefits, but are physically
unable to work beyond the current EEA. A recent RAND analysis reported
that 19 percent of early retirees claimed a work-limiting health
condition that would have limited their ability to continue in the paid
labor force. To protect this population, the Commission proposal sets
aside adequate resources to fund a hardship exemption for up to 20
percent of retirees. This exemption would allow beneficiaries to
continue to claim benefits at age 62 as the EEA and NRA increase, and
hold them harmless from additional actuarial reduction resulting from
increased NRA. The Commission is charging the Social Security
Administration with designing a policy over the next ten years that best
targets the population for whom an increased EEA poses a real hardship,
and considering relevant factors such as the physical demands of labor
and lifetime earnings in developing eligibility criteria.
At the same time, the Commission recommends
eliminating a provision that allows retirees who claim benefits early to
withdraw a benefit application and return benefits received – even years
after claiming – without paying interest or inflation, before reapplying
for benefits at a later age and with a smaller actuarial reduction. This
loophole is in effect an interest-free loan for wealthier retirees able
to take advantage of it.
RECOMMENDATION 5.6: GRADUALLY INCREASE THE
TAXABLE MAXIMUM TO COVER 90 PERCENT OF WAGES BY 2050.
As recently as the early 1980s, the Social Security
payroll tax covered 90 percent of wages (in other words, 9 of every 10
dollars in wages were subject to the payroll tax). Since then, however,
the taxable maximum wage cap (currently $106,800) has not grown as fast
as wages above the cap; as a result, less than 86 percent of wages were
subject to the payroll tax in 2009, and less than 83 percent will be
subject to the tax by 2020. The Commission proposes to gradually
increase the taxable maximum so that it covers 90 percent of wages by
2050. This recommendation would result in a taxable maximum of about
$190,000 in 2020, versus approximately $168,000 in current law. The
proposal will also de-link increases in the taxable maximum from
increases in the Cost of Living Adjustment (COLA), allowing the taxable
maximum to increase even in zero-COLA years.
RECOMMENDATION 5.7: ADOPT IMPROVED MEASURE OF
CPI.
Use the chained CPI, a more accurate measure of inflation, to calculate
the Cost of Living Adjustment for Social Security beneficiaries.
As with the rest of the mandatory budget and the
tax code, we recommend relying on the “chained CPI” to calculate the
Cost of Living Adjustment (COLA) in Social Security, rather than the
standard CPI. The Bureau of Labor Statistics has stated that the chained
CPI is designed to more closely approximate a cost-of-living index than
the standard CPI, and experts on both sides of the aisle have supported
this technical improvement to the index.
RECOMMENDATION 5.8: COVER NEWLY HIRED STATE AND
LOCAL WORKERS AFTER 2020.
After 2020, mandate that all newly hired state and local workers be
covered under Social Security, and require state and local pension plans
to share data with Social Security.
Under current law, more than 90 percent of all
workers are covered by Social Security, but a small share of states and
localities exclude their employees from Social Security and instead
maintain separate retirement systems. As states face a double hardship
of prolonged fiscal challenges and an aging workforce, relying entirely
on this pension model has become riskier for both government sponsors
and for program participants, and a potential future bailout risk for
the federal government. To mitigate this risk and to plan for an orderly
transition to comprehensive Social Security coverage, the Commission
proposes to mandate coverage for all state and local workers newly hired
after 2020.
Full coverage will simplify retirement planning and
benefit coordination for workers who spend part of their career working
in state and local governments, and will ensure that all workers,
regardless of employer, will retire with a secure and predictable
benefit check. To improve the coordination of benefits for existing
part-career state and local workers, the Commission also recommends
requiring state and local pension plans to share data with Social
Security.
RECOMMENDATION 5.9: DIRECT SSA TO BETTER INFORM
FUTURE BENEFICIARIES ON RETIREMENT OPTIONS.
Direct the Social Security Administration to improve information on
retirement choices, better inform future beneficiaries on the financial
implications of early retirement, and promote greater retirement
savings.
Working longer and saving more has significant
positive implications for both individuals and society as a whole. Yet
the mixed signals sent to individuals often lead them to make less
informed, and potentially precarious, choices. To help correct this, we
propose directing SSA to provide better information to the public on the
full implications of various retirement decisions, with an eye toward
encouraging delayed retirement and enhanced levels of retirement
savings. We encourage SSA to consider behavioral economics approaches
(such as structured choice and others based in sound science) when
providing this information.
Note that the Commission does not make specific
recommendations to reform the Social Security Disability Insurance (DI)
program or the Supplemental Security Insurance (SSI) program beyond
program integrity investments discussed in recommendation 6.4. The
Commission recommends a comprehensive redesign of the DI program to
modernize both the program objectives and the eligibility criteria to
better provide adequate and appropriate support to the disabled
community without putting in place barriers to work and full community
participation. This redesign is a critical next step, but is beyond the
scope of this Commission.
RECOMMENDATION 5.10: BEGIN A BROAD DIALOGUE ON
THE IMPORTANCE OF PERSONAL RETIREMENT SAVINGS.
Individuals need more financial assets and less
debt, especially for retirement. Social Security forms the first tier of
support for retirement but was never intended to be the sole source of
retirement income. Retirement security solutions need to recognize and
incorporate the challenges for self-reliant Americans who take
responsibility for their families through a lifetime of work. Business
owners and employees have historically negotiated over retirement
benefits, and government employers face revenue challenges. Many private
and public pension plans face serious underfunding of their long-term
obligations.
A serious bipartisan conversation needs to take
place regarding incentives to generate personal retirement savings that
supplement Social Security and addresses the gap between what Americans
need for retirement and what they currently have. Employers and
employees can both play a role in strengthening the personal retirement
savings of Americans. An ideal system should be open to all, portable,
prevent leakage from high fees and early withdrawals and allow for
pooled investments that can spread risk. It should encourage Americans
to build wealth through savings and investment that will generate a
return sufficient to allay fears that retirees will outlive their
savings, and should permit Americans to have the option to transmit the
remainder of their accumulated savings to their heirs. Americans need a
fiscally responsible personal retirement savings system that is advanced
funded, supplements the pay-as-you-go Social Security system, and
accumulates funds for investments in business and infrastructure to help
sustain a healthy economic growth rate.
Figure
12: Social Security Reform Provisions
75
Year
75th Year
Gradually phase in progressive changes to benefit formula,
modifying PIA factors to 90%|30%|10%|5% by 2050
45%
51%
Offer minimum benefit of 125% of poverty for an individual
with 25 years of work; index minimum benefit level to wage
growth
-8%
-6%
Index normal retirement age (NRA) and earliest eligibility
age to longevity so that they grow about 1 month every two
years. Also direct SSA to create “hardship exemption”
18%
30%
Provide benefit enhancement equal to 5% of the average
benefits (spread out over 5 years) for individuals who have
been eligible for benefits for 20 years
-8%
-6%
Gradually increase taxable maximum to cover 90% of earnings
by 2050
35%
22%
Apply refined cost of living measure (chained-CPI) to COLA
26%
17%
Cover newly hired state and local workers after 2020
8%
0%
Add increased flexibility in retirement claiming options by
allowing retirees to collect half of their benefits at a
time, including by allowing them to collect the first half
at age 62
-
-
SHARE OF EXISTING SHORTFALL CLOSED:
112%
102%
The plan proposed by the Commission is designed to restore actuarial
balance as a stand-alone proposal. However, the tax reform process
recommended by the Commission may separately result in additional
payroll tax revenues into the Social Security system as a result of base
broadening measures which would likely cause employers to shift some
portion of non-wage compensation into wages (with resulting indirect
increase in payroll tax revenues). As noted in the tax reform section,
the Commission recommends that the precise details of tax reform be
developed under a fast track procedure over the next two years. The
impact of this reform on trust fund revenues will depend on the
decisions Congress makes in the process. If Congress considers the
Commission’s Social Security recommendations in conjunction with or
subsequent to tax reform legislation that results in additional trust
fund revenue, this additional revenue will provide flexibility to
moderate the changes in benefits or taxation recommended by the
Commission.
Figure 13:
Social Security Distributional Analysis
2050
Distribution (Including Illustrative Hardship Benefit)
Average
Annual Benefit
Mean
Change in Benefits
Scheduled
Payable
Plan
Payable
Scheduled
Bottom
Quintile
$9,732
$7,656
$10,284
31.9%
3.8%
2nd Quintile
$14,268
$11,208
$14,340
27.3%
0.0%
Middle
Quintile
$18,000
$14,148
$16,488
16.2%
-8.7%
4th Quintile
$22,140
$17,400
$18,840
8.4%
-14.8%
Top Quintile
$27,480
$21,600
$22,416
3.4%
-18.7%
2070
Distribution (Including Illustrative Hardship Benefit)
Dec. 3, 2010 – Most of the initial reactions to the
proposal on December 1 by President Obama’s special committee seeking
ways to reduce the U.S. deficit focused on changes to Medicare as being
the most dramatic of the adjustments recommended. Medicare, no doubt, is
critical to senior citizens but the program closer to the hearts of
millions of seniors is Social Security – the security blanket. The
committee’s report does urge drastic changes in this program to and says
unless the nation acts the booming number elderly will “bring the Social
Security program to its knees.”
