Most agree that something must be done to restrain future costs or raise additional revenues, but few agree on what should be done or when. Our research shows what is likely to happen to future benefits and poverty under different policies.
About the Research
Research like ours requires methodological sophistication. Comprehensive models first developed by Urban Institute staff in the early 1970s can now project the long-term costs of retirement and aging policies. Our models can show what happens to prototypical workers under different scenarios and can simulate the long-term effects of potential changes to Social Security on retirement benefits and incomes. For example, the model has been used to simulate a Social Security system with personal accounts (including different annuitization options and guaranteed benefit provisions), to estimate the effects of Social Security reform on disability benefits, and to forecast the retirement consequences of the many low-wage, single mothers now entering the workforce.
We recently analyzed proposals from the President's Commission to Strengthen Social Security, which called for personal savings accounts and price indexing of the formula that determines initial benefits. These changes, we told the Social Security Administration, would significantly affect poverty rates among older Americans. The size of future benefits that include personal accounts will depend greatly on the pattern of market returns during workers' careers. But even more optimistic personal account scenarios are unlikely to offset the benefit reductions attributable to a switch to a price-indexed benefit formula. Some vulnerable groups—divorced or never-married people, African Americans, and those without a high school diploma, for instance—could be pushed closer to poverty with this type of change in the benefit formula.
Still, personal accounts involve investing only part of the 12.4 percent Social Security tax. The current debate ignores the more important challenges facing the system. For instance, today's headlines largely skirt the issue of poverty—the key reason Franklin D. Roosevelt conceptualized the program 70 years ago. Likewise, few pundits discuss the outdated retirement age and inequities across families.
Recent Findings
Below is news from the latest studies, opinion pieces, papers, books, presentations, and journal articles:
The Social Security reform debate should be wider ranging.
Poverty may be a good place to start. Poverty rates at older ages have fallen steadily over the past 50 years, but remain stubbornly high for certain vulnerable groups, including African Americans, Hispanics, and widowed, divorced, and never-married women. Social Security benefits don't amount to much for retirees who spent their entire lives in low-wage jobs. In fact, over a third of all retirees, and more than half of retired women, get monthly Social Security benefits that leave them in poverty if they have no other sources of income. The solution isn't necessarily spending more, but spending wisely by targeting resources to those who need them most.
Inequality is another irksome issue. Today, a spouse who doesn't work, doesn't raise children, and doesn't pay any taxes can receive hundreds of thousands of dollars more in benefits than a single mother who works, raises children, and pays taxes. Yet, two-earner couples often receive less Social Security benefits than they would if one spouse brought in all the money, even though they pay the same tax bill as a one-breadwinner couple.
Much of the system may be outdated. The single-earner, married-couple family of the 1930s, when the system was created, is not today's norm. Yet, Social Security law still largely reflects those times, paying generous spousal benefits at the expense of working single mothers, whose numbers are rising.
Using our computer models, researchers show how policymakers can change the current system to target benefit increases to the most vulnerable retirees, such as low-skilled men and unmarried women. For example, our research shows that increasing survivor benefits in Social Security would raise income for older and widowed women. But if these increases were not capped, much of the additional resources would go to wealthier women. Models also show the extent to which Social Security can reward childrearing through more direct mechanisms, such as child care credits. Basic equity and efficiency principles—the same ones invoked to create the Social Security program—can serve as a benchmark for comparing proposals.
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Personal savings accounts, other proposed reforms may create additional uncertainties.
Our projections using dynamic microsimulation techniques highlight the risks and rewards of personal savings accounts. For example, increasing real returns by one percentage point for both stocks and bonds, and assuming that these rates will follow historical patterns, could increase personal account benefits by almost 18 percent for those ages 62 to 69 in 2050. Less favorable market patterns, however, could reduce those benefits by half.
Other proposed reforms would change the benefit-distribution formula. Increases in survivor benefits, for example, would target older and widowed women. Higher minimum benefits would have a more global reach. One recent analysis finds that suggested changes to how Social Security benefits are adjusted to keep pace with inflation would save Social Security money, but it would also create financial woes for older retirees who have been receiving benefits for many years.
Some analysis shows how Social Security reform might push more people to apply for Supplemental Security Income (SSI), a program designed to guarantee a floor of income for poor elderly and disabled persons. However, many important parameters in the SSI program are not adjusted for inflation, which could deter some potential applicants.
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Working longer could ease the Social Security problem.
One way of relieving pressures on the Social Security system would be to encourage workers to delay retirement. By working longer, people produce additional goods and services that can raise their living standards and generate tax revenue that helps cover the costs of retirement and other government programs. Working longer also enhances financial security in old age, enabling people to accumulate more savings and more Social Security and pension credits while reducing the number of years that they must draw down their wealth. Our simulations show that a typical retiree who delays retirement from age 62 to age 67 could increase his or her net annual income at age 75 by more than 50 percent.
Looking ahead, the baby boomers—born between 1946 and 1964—are less likely than current retirees to have enough retirement income to live at their pre-retirement standard. Retirement savings rates bear close scrutiny since Social Security's long-term financial imbalance may lead to benefit cuts, forcing more people to rely more on their own savings. Further, most people with employer-sponsored retirement plans now participate in 401(k) plans, not traditional pensions, so their benefits will depend on how much they choose to put aside when working and on the uncertain investment returns they earn. That said, preliminary evidence suggests that most households do prepare well enough for retirement.
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The Research Team
- Barbara Butrica, senior research associate, an economist and expert on retirement and Social Security;
- Adam Carasso, research associate, an analyst in tax, transfer, and retirement policy;
- Melissa Favreault, senior research associate, a sociologist and an expert on aging and Social Security;
- Richard Johnson, principal research associate, an economist and expert on pensions, retirement, and aging;
- Janette Kawachi, research associate, a sociologist specializing in older worker employment patterns, retirement behavior and post-retirement income security;
- Gordon Mermin, research associate, an economist focused on factors affecting future retirement incomes;
- Rudolph Penner, senior fellow, former head of the Congressional Budget Office;
- Karen Smith, senior research associate, an expert on the development of microsimulation models and retirement income trends;
- Eugene Steuerle, senior fellow, former deputy assistant secretary of the Treasury;
- Lawrence Thompson, senior fellow, former deputy commissioner of the Social Security Administration;
- Eric Toder, senior fellow, former Deputy Assistant Secretary of the Treasury;
- Cori Uccello, consultant, an actuary and expert on pension policy and savings adequacy and also a senior health fellow at the American Academy of Actuaries;
- Patrick Weise, research associate, a modeler focused on private pension income and disability benefits under private account systems; and,
- Sheila Zedlewski, center director, an expert on retirement and cash assistance.
Publications
Additional related information of possible interest:
