Social Security Benefits, Finances, and Policy Options

Social Security Benefits, Social Security Benefits, Finances, and Policy Options Finances, and Policy Options A Primer A Primer National Academy of Social Insurance www.nasi.org October 2015

What is What is Social Security? Social Security?

How Many People Receive Social Security? 59 million people receive Social Security each month, in one of three categories: Retirement insurance Survivor insurance Disability insurance Nearly 1 in 5 Americans gets Social Security benefits. About 1 in 4 families receives income from Social Security. Social Security Administration (SSA), 2015a; National Academy of Social Insurance, 2015. 3

Who Receives Social Security? 39.7 million retired workers 8.9 million disabled workers 4.2 million widows and widowers 2.5 million spouses 1.0 million adults disabled since childhood 3.1 million children SSA, 2015a. 4

How Much Does Social Security Pay? (July 2015) Average Monthly Average Monthly Benefit Benefit Average Yearly Average Yearly Benefit Benefit By Beneficiary Type: By Beneficiary Type: $1,336 $16,032 Retired workers $1,165 $13,980 Disabled workers $1,282 $15,384 Widows or widowers (60 or older) By Family Type: By Family Type: Retired worker and spouse (62 or older) Widowed mother or father (under 60) and two children Disabled worker and one or more children $2,196 $26,352 $2,631 $31,572 $1,785 $21,420 SSA, 2015a; SSA, 2015b; U.S. Department of Health and Human Services, 2015. 5

How Do Benefits Compare to Earnings? Replacement Rates for Retired Worker Age 65, 2015 Replacement Rates for Retired Worker Age 65, 2015 $112,090 $120,000 Career-Average Wages Benefits $100,000 $74,060 $80,000 $60,000 $46,290 $40,000 26% 26% 33% 33% $20,830 40% 40% 53% 53% $20,000 $29,420 $24,290 $18,320 $11,120 $0 "Low" "Medium" "High" "Maximum taxable" Earnings Level Earnings Level Source: Social Security Administration. 2015. Replacement Rates For Hypothetical Retired Workers. Actuarial Note #2015.9. Baltimore, MD: Social Security Administration, Office of the Chief Actuary. SSA, 2015c. 6

How Many Seniors Rely on Social Security for Most of Their Income? 86% of people 65 and older get Social Security. Nearly 2 in 3 (65%) get half or more of their income from Social Security. About 1 in 3 (36%) get almost all (90% or more) of their income from Social Security. SSA, 2014a: Tables 2.A1 and 9.A1. 7

Reliance on Social Security By Race and Gender Percent of beneficiaries age 65 and older whose Percent of beneficiaries age 65 and older whose Social Security benefits make up: Social Security benefits make up: Half or more Half or more of their income of their income 64% 72% 67% 74% 90% or more 90% or more of their income of their income 35% 46% 44% 53% By Race: By Race: White Black Asian Hispanic By Gender: By Gender: Married couples Unmarried women Unmarried men 52% 77% 67% 22% 49% 40% 8 SSA, 2014a: Tables 9.A2 and 9.A3; and SSA, 2013.

Most Elderly Dont Receive Pensions Percent with Income from Pensions, 2012 All Age 65+ All Age 65+ Unmarried Men Unmarried Men 39% 39% 39% 39% 61% 61% 61% 61% Pension Pension No pension No pension Unmarried Women Unmarried Women Couples Couples 34% 34% 47% 47% 53% 53% 66% 66% SSA, 2014a: Tables 2.A1 and 2.B1. 9

How Are Benefits Projected to Change in the Future? Benefits will grow faster than prices, but slower than wages. The increase in the full-benefit retirement age from 65 to 67 between 2002 and 2027 means that benefits will replace a smaller share of retirees past earnings. National Academy of Social Insurance, 2015. 10

Increase in Full Retirement Age (FRA) Lowers Benefits at Any Age They Are Claimed 140 Full Retirement Age 65 Percent of Full Benefit Payable Percent of Full Benefit Payable 120 Full Retirement Age 67 100 80 60 40 20 0 62 63 64 65 66 67 68 69 70 Age When Benefits Are Claimed Age When Benefits Are Claimed Gregory et al., 2010. 11

Net Social Security Replacement Rates Will Fall Medium Earner s Replacement Rate at 65 (after Medicare Parts B & D premiums and taxation of benefits) 45 38% 38% 40 Percent of Prior Earnings Percent of Prior Earnings 34% 34% 35 31% 31% 30 25 20 15 10 5 0 2030 2030 2020 2020 2010 2010 Munnell, 2013. 12

What is Social Security Disability Insurance? Disability Insurance (DI) pays monthly benefits to 8.9 million workers who are no longer able to work due to illness or impairment. It is part of the Social Security program. Benefits are based on the disabled worker's past earnings. To be eligible, a disabled worker must have worked in jobs covered by Social Security. 13

What are the Most Common Disabilities for DI Recipients? Mental Impairments Musculoskeletal Conditions 20.5% 20.5% 31.4% 31.4% Heart Disease/ Circulatory 9.3% 9.3% Nervous System/ Sense Organ Impairments 8.3% 8.3% 30.5% 30.5% Injuries/ Cancers/ Other Conditions SSA, 2014b: Table 21. 14

Attributes of Disabled- Worker Beneficiaries 3 in 10 disabled workers have incomes below 125 percent of the poverty threshold. Disabled worker beneficiaries are more likely than other adults to be: Older (the average age of disabled worker beneficiaries is 53, and 7 in 10 are over 50). African-American. Lower educational attainment (more than half have only a high school diploma or less; almost 15% did not finish high school). Bailey and Hemmeter, 2015; SSA, 2014b. 15

Who Pays for Social Security? Workers and their employers pay with Social Security contributions under the Federal Insurance Contributions Act (FICA). 16

How Much Do Workers Pay? Workers pay: 6.2% of their earnings for Social Security, and 1.45% of their earnings for Hospital Insurance (HI) under Medicare (Part A). Employers pay an equal amount (6.2% and 1.45%). The total is 12.4% for Social Security 12.4% for Social Security and 2.9% for HI. 2.9% for HI. The maximum Social Security contribution base is $118,500 $118,500 in 2015. National Academy of Social Insurance, 2015. 17

Where Does the Money Go? It is credited to the Social Security trust funds. Of the 6.2% tax rate: 5.3% goes to the retirement and survivor retirement and survivor insurance fund insurance fund 0.9% goes to the disability insurance fund disability insurance fund Projections of income and outgo of the trust funds are made by the Social Security Administration actuaries. Board of Trustees, 2015. 18

The Financial The Financial Outlook Outlook

2014 Finances Trust fund income = Trust fund outgo = Surplus = $884.3 billion (mostly contributions) $859.2 billion (mostly benefits) $25 billion $25 billion By law, surpluses are invested in U.S. Treasury securities and earn interest that goes to the trust funds. SSA, 2015d; Board of Trustees, 2015. 20

Where is Social Security Income From? Shares of Income to the Trust Funds, 2013 3% 3% 11% 11% 85% 85% Workers' and employers' Social Security taxes Interest on reserves Income taxes on benefits SSA, 2015d. 21

What are Social Security Reserves, or Assets? Social Security income that is not used immediately to pay benefits and costs is invested in special-issue Treasury securities (or bonds). The bonds earn interest that is credited to the trust funds. The accumulated surpluses held in Treasury securities are called Social Security reserves, or trust fund assets. The Treasury securities are secure investments that are backed by the full faith of the United States. 22

Disability Insurance Projections By law, Social Security has two separate trust funds: Disability Insurance (DI) Disability Insurance (DI) trust fund Old Old- -Age and Survivors Insurance (OASI) Age and Survivors Insurance (OASI) trust fund Without prior Congressional action, the DI trust fund is projected to be depleted in late 2016. Congress could reallocate part of the existing 6.2% tax rate from OASI to DI, which would equalize the status of the two funds. Reno, Walker, and Bethell, 2013. 23

How Big are Social Security Trust Fund Assets? 3.5 2019: $2.9 trillion (projected) 2014: $2.8 trillion 3.0 Trillions of Dollars Trillions of Dollars 2.5 2.0 1.5 1.0 1985: $0.04 trillion 0.5 0.0 1985 1990 1995 2000 2005 2010 2015 2020 Board of Trustees, 2015: Table VI.G8. 24

What is the Cash Flow Balance for Social Security? $1,200 Amount (in billons of current dollars) Amount (in billons of current dollars) $1,000 $800 Total income $600 Outgo $400 $200 $0 2014 2015 2016 Board of Trustees, 2015: Table VI.G8. 25

How Do Actuaries Estimate the Future? Review the past: birth rates, death rates, immigration, employment, wages, inflation, productivity, interest rates. Make assumptions for the next 75 years (longer than the rest of the government). Three scenarios: Low cost; High cost; Intermediate (best estimate). 1) 2) 3) Board of Trustees, 2015. 26

The Long-Range Projection (Best Estimate) In 2020, revenues plus interest income to the trust funds will be less than total expenditures for that year. Reserves will start to be drawn down to pay benefits. In 2034, trust fund reserves are projected to be depleted. Income is projected to cover 79% of benefits due then. By 2088, assuming no change in taxes, benefits or assumptions, revenue would cover about 73% of benefits due then. Board of Trustees, 2015. 27

Other Scenarios Low Cost Low Cost: : Social Security would be solvent for 75 years and beyond. High Cost High Cost: : Trust fund reserves would be depleted in 2028, instead of 2034. Board of Trustees, 2015. 28

The Actuarial Deficit (Best Estimate) The long The long- -range deficit is 2.68% of taxable range deficit is 2.68% of taxable payroll. payroll. This Means: This Means: The gap would be closed if the Social Security contribution rate were raised from 6.2% to 7.6% for workers and employers each. Board of Trustees, 2015. 29

Why Will Social Security Cost More in the Future? The number of Americans over age 65 will grow because: Boomers are reaching age 65 Boomers are reaching age 65 People are living longer after age 65 People are living longer after age 65 Birth rates are projected to remain at replacement levels. People 65 and older will increase from 14% to 23% of all Americans by 2090. Board of Trustees, 2015: Tables V.A2 and IV.B3. 30

Percent of the Population Receiving Social Security and Percent Age 65+, 2010-2090 50 45 40 Percent of the Population Percent of the Population 35 30 26% 26% 24% 24% Beneficiaries Beneficiaries 25 18% 18% 23 23% 20 21% 21% Age 65+ Age 65+ 15 15% 15% 10 5 0 2010 2020 2030 2040 2050 2060 2070 2080 2090 Board of Trustees, 2015: Tables V.A2 and IV.B3. 31

Can We Afford Can We Afford Social Security Social Security in the Future? in the Future?

Social Security in the Broader Economy Social Security as a Percent of the Economy (GDP), 2010-2090 50 45 40 Percent of GDP Percent of GDP 35 30 25 20 15 10 6.0% 6.0% 6.2% 6.2% 4.9% 4.9% 5 0 2010 2020 2030 2040 2050 2060 2070 2080 2090 Board of Trustees, 2014: Table VI.G4. 33

Taxable Payroll and Social Security Outgo as a Percent of the Economy (GDP) 2010-2090 50 45 37% 37% 40 35% 35% 34% 34% 35 Percent of GDP Percent of GDP 30 Taxable payroll as % of GDP 25 Social Security outgo as % of GDP 20 15 10 6% 6% 6% 6% 5% 5% 5 0 2010 2020 2030 2040 2050 2060 2070 2080 2090 Board of Trustees, 2014: Tables VI.G4 and VI.G5. 34

Strengthening Strengthening Social Security Social Security

Low-Cost Options to Improve Adequacy Options that would improve the adequacy of benefits include: 1) Update the special minimum benefit to ensure that long- serving, low-paid workers can remain out of poverty when they retire. 2) Reinstate student benefits until age 22 for children of disabled or deceased workers (currently, benefits for these children stop at age 18-19). 3) Allow childcare years to count towards Social Security benefits. 4) Increase benefits for the oldest old (ages 85 and older). 5) Increase benefits for widowed spouses of low-earning couples. 36 Reno and Lavery, 2009.

Options for Raising Revenues Options that would help raise revenues include: 1) Lift the cap (now $118,500) on the earnings on which workers and employers pay Social Security contributions. 2) Cover all salary reduction plans (contributions subject to FICA), just like 401(k)s. 3) Schedule modest contribution rate increases in the future when funds will be needed. 4) Dedicate progressive taxes to pay part of Social Security's future cost. Reno and Lavery, 2009. 37

Other Options for Solvency Some proposals would reduce benefits for some or all beneficiaries in order to increase solvency. For example, raising the retirement age amounts to an across-the-board cut in benefits, which also reduces the program s cost. Switching to the chained CPI is also a benefit cut for all beneficiaries, because Social Security s cost-of-living adjustments (COLAs) would be smaller each year. Reno and Lavery, 2009. 38

Public Opinion Public Opinion on Social Security on Social Security

Consistent Findings Throughout the Study In focus groups, Americans were concerned about benefits being too low. In the survey, Americans said they don t mind paying for Social Security and are willing to pay more. In the trade-off analysis, the preferred package would: Gradually increase taxes increase taxes in two ways for high earners and for all workers. Increase benefits Increase benefits in two ways for low earners and for all beneficiaries via the COLA. Walker, Reno, and Bethell, 2014. 40

Majorities of Republicans, Democrats, and Independents Agree Percent agreeing: It is critical that we preserve Social Security for future generations, even if it means ... increasing the Social Security taxes paid by working Americans increasing the Social Security taxes paid by wealthier Americans 100% 92% 92% 90% 84% 84% 84% 84% 83% 83% 77% 77% Percent Agreeing Percent Agreeing 76% 76% 80% 71% 71% 69% 69% 70% 60% 50% 40% 30% 20% 10% 0% Total Republican Democrat Independent Walker, Reno, and Bethell, 2014.

Support for the Preferred Package of Policy Options in Trade-off Analysis Walker, Reno, and Bethell, 2014. 42

Recap Benefits are modest (dollars and replacement rates). Yet they are most beneficiaries main source of income. most beneficiaries main source of income. Social Security benefits will replace a smaller share of earnings in the future than they do today (replacement rates are declining (replacement rates are declining because of the increase in the retirement age) because of the increase in the retirement age). Revenue Revenue increases Social Security s future finances. increases or benefit cuts will or benefit cuts will be needed be needed to balance Lawmakers have many options have many options to raise revenues, lower future benefits, or increase benefits to improve adequacy. Americans Americans value Social Security value Social Security and are willing to pay for it. Americans report they would rather pay more Americans report they would rather pay more than see future benefits reduced. 43

References Board of Trustees. 2015. Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Washington, DC: Social Security Administration. Bailey, Michelle Stegman and Jeffrey Hemmeter. 2015. Characteristics of Noninstitutionalized DI and SSI Program Participants, 2013 Update. Research and Statistics Note No. 2015-02. Washington, DC: Social Security Administration. http://www.ssa.gov/policy/docs/rsnotes/rsn2015-02.html Gregory, Janice M., Thomas N. Bethell, Virginia P. Reno, and Benjamin W. Veghte. 2010. Strengthening Social Security for the Long Run. Social Security Brief No. 35. Washington, DC: National Academy of Social Insurance. Munnell, Alicia H. 2013. Social Security s RealRetirement Age is 70. Brief No. 13-15. Chesnut Hill, MA: Center for Retirement Research at Boston College. National Academy of Social Insurance. 2015. Social Security Finances: Findings of the 2015 Trustees Report. Social Security Brief No. 45. Washington, DC: National Academy of Social Insurance. Reno, Virginia P. and Joni Lavery. 2009. Fixing Social Security: Adequate Benefits, Adequate Financing. Washington, DC: National Academy of Social Insurance. Reno, Virginia P., Elisa A. Walker, and Thomas N. Bethell. 2013. Social Security Disability Insurance: Action Needed to Address Finances. Social Security Brief No. 41. Washington, DC: National Academy of Social Insurance. Social Security Administration. 2015a. Beneficiary Data: Number of Social Security Recipients at the end of July 2015. Baltimore, MD: Social Security Administration, Office of the Chief Actuary. www.ssa.gov/cgi-bin/currentpay.cgi

References (cont.) Social Security Administration. 2015b. Beneficiary Data: Benefits Paid by Type of Family. Baltimore, MD: Social Security Administration, Office of the Chief Actuary. www.ssa.gov/OACT/ProgData/famben.html Social Security Administration. 2015c. Replacement Rates For Hypothetical Retired Workers. Actuarial Note #2015.9. Baltimore, MD: Social Security Administration, Office of the Chief Actuary. http://www.socialsecurity.gov/oact/NOTES/ran9/index.html Social Security Administration. 2015d. Trust Fund Data. Baltimore, MD: Social Security Administration, Office of the Chief Actuary. http://www.socialsecurity.gov/OACT/ProgData/allOps.html Social Security Administration. 2014a. Income of the Population 55 or Older, 2012. Washington, DC: Social Security Administration, Office of Research, Evaluation, and Statistics. Social Security Administration. 2014b. Annual Statistical Report on the Social Security Disability Insurance Program, 2013. Washington, DC: Social Security Administration, Office of Research, Evaluation, and Statistics. Social Security Administration. 2013. Further breakdown of table 9.A1. Unpublished data, received March 12, 2013. Washington, DC: Social Security Administration, Office of Research, Evaluation, and Statistics. Walker, Elisa A., Virginia P. Reno, and Thomas N. Bethell. 2014. Americans Make Hard Choices on Social Security: A Survey with Trade-Off Analysis. Washington, DC: National Academy of Social Insurance. U.S. Department of Health and Human Services. 2015. 2015 Poverty Guidelines. Washington, DC: Department of Health and Human Services. http://aspe.hhs.gov/poverty/15poverty.cfm