How Would Changes to Social Security Affect the Poor?

Now that the President Obama۪s National Commission on Fiscal Responsibility and Reform has delivered its recommendations, Spotlight on Poverty and Opportunity will present a diversity of voices to discuss how budgetary changes will (or should) affect low-income individuals. Contributions will cover the following topicsEconomic Stability and Recovery, Social Security, Health Care, and Taxes and Tax Expenditures.

 

This commentary is the latest in the series, entitled “Opportunity and the Budget: Needs, Choices, and the Future.” It addresses the following question, “Social Security: Does the Program Require Changes and How Will They Impact the Poor?”

Here۪s something to celebrate: Social Security is the nation۪s single most effective anti-poverty program.

 

Here۪s something to worry about: making the wrong kinds of changes to Social Security could push more Americans into poverty in the future.

 

The nation is confronting huge deficits and Social Security is a big program that faces a long-term revenue shortfall. So why not trim it a bit? To help answer that question, let۪s consider some important points:

 

Social Security isn۪t contributing to the deficit. Since 1935, the program has collected $14.6 trillion in revenues and interest and paid out $12.0 trillion, leaving reserves of $2.6 trillion.

 

Social Security costs will increase only slightly in the future. Benefit payments equal nearly five percent of gross domestic product now, will rise to about six percent in 2030 when all boomers are retired, and are projected to stay at about six percent thereafter.

 

Social Security is keeping millions of Americans out of poverty. Since 1959, it has reduced the official poverty rate among the elderly from 35 percent to less than ten percent. Today it keeps nearly 20 million Americans out of poverty, including more than a million children. Without Social Security, about 45 percent of all seniors would be poor.

 

Social Security benefits are modest.  Benefits are only about $14,000 each year on average. They are protected against inflation by annual cost-of-living adjustments, but are eroded by rising Medicare premiums and other out-of-pocket health care costs. The risk of experiencing dire financial distress increases as beneficiaries grow older, develop age-related health problems, and exhaust other resources.

 

Millions of working-age Americans haven۪t been able to save for the future. Wages, especially for lower-income workers, have been stagnant for decades. Only about one out of every five workers is covered by a defined-benefit pension. Most workers with 401(k) plans haven۪t accumulated enough funds to yield adequate annuities. The housing crisis has devalued many workers۪ principal assets. On top of this, laid-off workers in their 50s, even if rehired, can۪t make up lost income and savings. So in the future, Social Security will be a crucial bulwark for more Americans than ever.

 

Social Security benefits are already being reduced. With the 1983 change to increase the age for full retirement benefits and ever-rising deductions for Medicare premiums, looking at benefits as a percentage of earnings highlights continuing reductions. Future benefits will replace an even lower percentage of prior earnings than in the pastdropping from 39 percent for an average earner age 65 in 2005 to 32 percent in 2030.

 

Rather than cutting benefits further which would undermine Social Security۪s effectiveness and increase the risk of impoverishing a broad swath of the middle class we should consider changes that strengthen the program.  For example, we could make changes in the following important directions:

 

·         Improve the Adequacy of Benefits in general;

 

·         Restore Benefits to help the children of disabled and deceased workers complete college; and

 

·         Improve the Special Minimum Benefit to ensure that men and women who spend their entire working lives in low-wage jobs do not face impoverishment in old age

 

Changes such as these would be sound investments and would reinforce Social Security۪s vital role to:

 

·         Stabilize Our Economy: benefit checks are a powerful counterforce during economic downturns;

 

·         Stabilize Families: with Social Security for aging parents, working adults can focus on providing for their children; and

 

·         Stabilize Communities: survivors۪ benefits enable grandparents to keep orphaned kids in their homes and out of trouble, taking pressure off state and local government resources

 

Reasonable revenue adjustments can balance Social Security for the long run and pay for modest improvements:

 

·         Lift the Cap on Taxable Wages so that it once again applies to 90 percent of covered earnings, thus ensuring that high earners contribute as much as Congress intended when it set the cap;

 

·         For Social Security Purposes Treat All Salary Reduction Plans Like 401(k) Plans; and

 

·         Schedule a Modest Contribution-Rate Increase to take effect 12-15 years hence, to avoid drawing down Social Security۪s reserves, pay for benefit improvements, and balance the system۪s finances. Another small adjustment in 40-50 years could extend balance beyond 75 years

 

In opinion polls Americans consistently say they would rather pay more into Social Security than see benefit cuts, and they say so across party lines: 93 percent of Democrats, 81 percent of Republicans, and 85 percent of independents say they don۪t mind paying for Social Security because they know it helps their families and the millions of other people who rely on it.

 

It۪s clear that the public recognizes the value of Social Security. The challenge today is to strengthen the nation۪s most effective poverty-prevention program. 

To view a PDF version of this document, click here.

 

Janice Gregory is the president of the National Academy of Social Insurance.