The Center's work on 'Reform Proposals' Issues


Happy 79th Birthday, Social Security!

August 13, 2014 at 2:04 pm

Social Security marks its 79th birthday tomorrow.  This highly successful program pays benefits to more than 58 million Americans.  It’s the single most important source of income for its elderly beneficiaries, contributing on average two-thirds of income for recipients over age 65.  For more than one-third of them, Social Security constitutes at least 90 percent of income (see graph).

Reliance on Social Security is especially high among the oldest — those who can no longer work and may have outlived their savings — and elderly blacks and Hispanics. Without Social Security, nearly half of elderly Americans would live below the official poverty line; instead, fewer than 10 percent do.

But Social Security isn’t just for the elderly.  It protects workers who suffer a severe medical impairment and children whose breadwinner dies, retires, or becomes disabled. We estimate that in 2012 — the latest year for which we have data — it lifted more than 22 million Americans of all ages above the official poverty line (see table).

Social Security benefits are modest.  The average retired worker or elderly widow collects only $1,300 a month, and disabled workers even less.  Nobody gets rich from Social Security: only 10 percent of retired workers get more than $2,000 a month (and fewer than 2 percent get more than $2,500).  Social Security benefits are low by international standards, too.

With the continued decline of the traditional defined-benefit pension, Social Security is the only retirement income most Americans will collect that’s indexed to inflation and guaranteed to last as long as they live.  And because it’s not means-tested, Social Security encourages people to supplement their retirement income by working part-time or by saving money.

Social Security faces a long-term shortfall that’s predictable and manageable, as our new paper on the trustees’ latest annual report explains.  Those who fear that Social Security won’t be around when today’s young workers retire misunderstand the trustees’ projections.  Even if policymakers did nothing, the program could still pay three-quarters of scheduled benefits after the trust funds run out in 2033.

Of course, policymakers should act well before then to place this extremely popular program (see here and here) on a sound long-term footing.  The best proposals would protect vulnerable workers and beneficiaries and give all participants ample notice of future changes.  A well-crafted package would also make targeted improvements to Supplemental Security Income, which is distinct from Social Security but has important overlaps.

Social Security is the most effective and successful income-security program in the nation’s history.  The President and Congress should design reforms judiciously so that it remains that way.

CBPP Updates Chart Book and Paper on Disability Insurance

August 5, 2014 at 10:06 am

We’ve updated two important pieces about Disability Insurance (DI), an integral part of Social Security that protects workers who can’t support themselves anymore because of a severe medical impairment, to reflect the recent Social Security trustees’ report.

The first of those pieces, our popular chart book, presents nearly two dozen graphs that tell policymakers and citizens key DI facts:  why it’s important, why the DI rolls have grown, who receives benefits, and what financing issues the program faces.  The chart below, for example, shows that nearly 9 million workers receive benefits from DI, while DI protects 150 million if a devastating disability strikes them.

The second, our recent paper, explains why, as my colleague Paul Van de Water reminded us, lawmakers must allocate a slightly bigger share of the current payroll tax to DI by 2016.  The Social Security payroll tax, which is 6.2 percent of wages up to $117,000 in 2014, which both employers and employees pay, finances the retirement and survivor programs (5.3 percent) and the disability program (0.9 percent.)  Simply revising that split — as policymakers have done 11 times in the past, in either direction — would avert a sharp and wholly unnecessary benefit cut in 2016 while policymakers work on the more important issue:  ensuring overall Social Security solvency.

These are just two of the many analyses we’ve done on this vital program.  Check out our collection here and related blog posts here.

Awaiting the 2014 Social Security Trustees’ Report

July 25, 2014 at 1:25 pm

Social Security’s trustees will release their annual review of the program’s finances on Monday, and while we’re not sure what the report will say, the trustees last year estimated that Social Security’s combined trust funds will be exhausted in 2033.  That was well within the range that the program’s trustees have projected in their reports for the past two decades (see table).

Even after the combined trust funds — the Old-Age and Survivors Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund — are exhausted, Social Security could still pay about three-fourths of scheduled benefits using its tax income, which is a fact that news stories often overlook.

Fluctuations from year to year in the trustees’ long-term estimates are normal.  A variety of demographic factors (such as fertility, mortality, and immigration) and economic variables (including wage growth, inflation, and interest rates) affect Social Security, and the actuaries constantly improve their methods.

Because of these fluctuations, revisions of a year or two, in either direction, are not a cause for alarm (or for celebration).  In fact, the trustees caution that their projections are uncertain.  For example, last year they judged that there was an 80 percent probability that trust fund exhaustion would occur sometime between 2029 and 2039 — and a 95 percent chance that it’d happen between 2028 and 2044.  More recently, the Congressional Budget Office (CBO) estimated that exhaustion would occur in 2030, largely because CBO expects somewhat faster improvements in mortality.  In short, all reasonable estimates show a manageable long-run challenge that needs to be addressed but not an immediate crisis.

The new report will note that the DI trust fund, which is legally separate from the much larger OASI trust fund, will need to be replenished sooner.  (Last year the trustees forecast that would be necessary in calendar year 2016; CBO projects that it’ll be necessary early in fiscal year 2017, which begins in October 2016.)  Traditionally, Congress has reallocated tax rates between the OASI and DI funds to address such challenges.  That’s why analysts usually focus on the outlook for the combined trust funds.

Legislators should boost DI’s share of the payroll tax by 2016 to avert a harsh and unnecessary cut in benefits to its severely impaired recipients.  And policymakers should work on a balanced package of Social Security reforms that achieves overall long-term solvency while preserving and even strengthening the program’s vital role in protecting breadwinners and their families.

You can find our analysis of last year’s report here, and our other Social Security analyses here.

We’ll be back on Monday with our initial reaction to the new Social Security and Medicare reports.

New Chart Book Paints Picture of Disability Insurance

July 21, 2014 at 1:53 pm

The Senate Finance Committee will hold a hearing this Thursday on Social Security Disability Insurance (DI).  We’ve just released a new chart book about DI.  Its more than 20 figures illustrate the essential facts and dispel some common misperceptions about this vitally important program.

For example, the following graph shows how growth in DI’s benefit rolls has slowed sharply.

The growth in the number of DI beneficiaries in recent decades stems largely from well-known demographic factors.  These include the growth of the population; the aging of the baby boomers into their 50s and 60s, which are years of peak risk for disability; growth in women’s labor force participation, which makes women much more likely to earn insured status for DI; and the rise in Social Security’s full retirement age from 65 to 66.

Both demographic and economic pressures on DI are easing.  In recent months, growth in the number of DI beneficiaries has slowed to its lowest rate in 25 years.  Social Security’s actuaries project that the program’s costs will level off as the economy continues to mend and baby boomers move from the disability rolls to the retirement rolls.

DI costs are projected to exceed revenues, however, and the program’s trust fund needs to be replenished in 2016.  Unless Congress increases the share of the Social Security payroll tax devoted to DI, beneficiaries would then face a 20 percent cut in benefits.

Reallocation between the DI trust fund and Social Security’s much larger Old-Age and Survivors Insurance (OASI) fund is a traditional method of addressing shortfalls in one program, and Congress should do so to avoid a harsh and unacceptable cut in benefits for an extremely vulnerable group.

For the full chart book, click here.

Congress Needs to Boost Disability Insurance Share of Payroll Tax

July 17, 2014 at 2:29 pm

Congress should increase the share of the Social Security payroll tax that’s devoted to Disability Insurance (DI) and reduce the share allocated to Old-Age and Survivors Insurance (OASI).  We explain in a new paper why that’s essential to avoid a 20 percent across-the-board cut in DI benefits in 2016, how Congress has reallocated payroll tax revenues many times in the past, and that reallocation has not been controversial.

The current Social Security tax is 6.2 percent of wages up to $117,000 in 2014, which both employers and employees pay.  Of this total, 5.3 percent of covered wages goes to the OASI trust fund, and 0.9 percent goes to the DI trust fund.

Traditionally, lawmakers have divided the total payroll tax between OASI and DI according to the programs’ respective needs.  Congress has reallocated payroll tax revenues many times — sometimes from OASI to DI, sometimes in the other direction — to maintain the necessary balance.

The current allocation reflects policymakers’ decision in 1994, when they last reallocated taxes between the programs.  The 1994 reallocations only partly mitigated the effects of the 1983 Social Security amendments, which slightly raised DI’s cost and cut DI’s share of the payroll tax.

Lawmakers expected that the 1994 reallocations would keep DI solvent until 2016.  Despite fluctuations in the meantime, current projections still anticipate that the trust fund will be depleted in 2016 as forecast.

DI’s anticipated trust fund depletion does not indicate that the program is out of control or that it’s “bankrupt;” that is, if the trust fund were depleted and policymakers took no action, the program could still pay about 80 percent of benefits.  But, at the same time, cutting benefits by one-fifth for an extremely vulnerable group of severely disabled Americans is unacceptable.

Ideally, Congress would address DI’s finances in the context of legislation to restore overall Social Security solvency, as we’ve previously pointed out.  But even if policymakers make progress toward a well-rounded solvency package before late 2016, which seems unlikely, any changes in DI benefits or eligibility would surely phase in gradually and hence do little to replenish the DI fund by 2016.  Consequently, reallocating payroll tax revenues between the two programs would still be necessary.

There is nothing novel or controversial in such a step, and failing to take it would be irresponsible.

Click here to read the full paper.