Social Security Current Reform Proposals: How They Would Affect People With June 1, 2011
Social Security Background on the Social Security Programs 2
Social Security 54.2 million people receive Social Security benefits from the retirement, disability, and survivors programs More than one-third of all monthly checks go to non-retired individuals 3
Social Security Insurance Retirement insures against poverty after worker retires Includes retirees with disabilities Spouses, including those with disabilities Disabled Adult Children Example of people with increased reliance on Social Security benefits Parents of children with disabilities with reduced earnings and savings due to care giving 4
Social Security Insurance (continued) Survivors insures dependents after worker dies Minor children and spouses of deceased workers and retirees Disabled widow(ers) Disabled adult children 5
Social Security Insurance (continued) Disability insures against loss of ability to work due to disability Disabled workers, their spouses and children, including disabled adult children Essential protection Millions of families face disability Adults with serious disabilities have very low employment rate Poverty rates twice as high for workers with disabilities as other groups who receive Social Security Equals half or more of TOTAL family income for about half of disabled worker beneficiaries 6
Current Design: The Positives Fixed monthly payment Ability to move among three programs: work history, age, & eligibility category Pay multiple family members based on one worker s earnings Adjusted annually for inflation (generally) 7
Social Security Background on Financing and Long-Term Solvency 8
Social Security & the Deficit National groups examining ways to reduce deficit, including Social Security changes Social Security did NOT cause the deficit Cutting benefits will NOT solve budget crisis Cutting benefits will deepen financial crisis for many people with disabilities 9
Social Security & the Deficit Social Security did NOT cause the deficit: It is self-funded By law, it can only spend money dedicated to the program No borrowing authority 10
Social Security s Finances It is NOT a crisis Social Security does face a long-term financing shortfall Only modest changes are needed to address shortfall 11
Current & Future Surplus Surplus = invested assets or Trust Fund reserves $2.6 trillion by end 2010 Will continue to grow 2011-2022 Projected to reach $3.7 trillion by 2022 12
Projected Shortfall Over 75 Years Less than 1 percent of Gross Domestic Product (GDP) Another measure = 2.22 percent of taxable payroll Previous Trustees forecasts = similar projection 13
Future Projections Pay 100% of scheduled benefits 2011 Trustees Report: until 2036 Pay reduced benefits (if no action taken) 2011 Trustees Report: 77% of scheduled benefits starting 2037 14
Social Security Background: How Social Security Benefits Are Calculated 15
How Social Security Benefits Are Calculated Benefit calculations under all programs (retirement, disability, survivors) use the same benefit formula Benefit formula is used to calculate Primary Insurance Amount or PIA 16
How Social Security Benefits Are Calculated (continued) Calculated based on the earnings of the worker Worker must have enough credits, or quarters of coverage, to be eligible Must have paid in 40 quarters or 10 years to be fully insured 17
How Social Security Benefits Are Calculated (continued) Younger workers qualify under the disability or survivor programs with fewer credits Exact number of quarters required is dependent on the age of the worker at the time of disability or death 18
How Social Security Benefits Are Calculated (continued) Social Security benefit amount is based on the worker s average earnings over their years of work Retirement Benefit: Based on 35 years Zero years included if less than 35 years Lowest years dropped out (if more than 35) 19
How Social Security Benefits Are Calculated (continued) Disability and survivors benefits: Number of years based on age of worker at onset of disability or death Use elapsed years The number of full calendar years since the person turned 21 If age 47 or over get 5 dropped years Under age 47 get 4 or less dropped years 20
How Social Security Benefits Are Calculated (continued) Once earnings determined, SSA indexes the person s earnings Done to update earnings to current levels Reflects earnings increases in average wage levels for each year Calculation results in Average Indexed Monthly Earnings or AIME 21
How Social Security Benefits Are Calculated (continued) Plug AIME into benefit formula Formula Replaces Percentage of AIME Current Formula (2011) 0-$749 = Replace 90% $749-$4517 = Replace 32% $4517 and up to taxable max = Replace 15% Dollar amounts at which replacement percentage changes ($749, $4517) are known as bend points 22
How Social Security Benefits Are Calculated (continued) Bend points change every year Replacement percentages in formula set by statute and do not change unless Congress changes them 23
How Social Security Benefits Are Calculated (continued) This calculation determines Primary Insurance Amount (PIA): Retirement Program Get full PIA as monthly benefit if retire at your Full Retirement Age (FRA) also sometimes referred to as Normal Retirement Age (NRA) Benefit is reduced if retire before then amount of reduction based on how long before reach full retirement age begin to collect benefits Youngest age at which benefits can be collected is known as Early Retirement Age or ERA 24
How Social Security Benefits Are Calculated (continued) Disability and survivors benefits are calculated as if someone retires at FRA Based on the full PIA Not reduced regardless of age at which disability onset or death occurs PIA is also plugged into another formula to determine family maximum to determine benefits of family members 25
Benefits Are Modest Under Current Formula 26
Benefits Are Large Percent of Income for Lower Income Retirees 27
Proposals and Options for Achieving Long-Term Solvency of the Social Security Programs 28
Possible Options: Solvency Two approaches, but could combine options from each: Cut benefits Increase revenue 29
What Is Needed to Achieve Long-Term Solvency Often looked at as a percentage of payroll As stated earlier: Need revenue increases or benefit cuts = to 2.22% of taxable payroll to make up shortage Will explain how much of the shortfall each option will solve (as available) 30
Major Reform Proposals to Date National Commission on Fiscal Responsibility and Reform known as Bowles/Simpson Recommendations of Co-Chairs only Commission Member Representative Jan Schakowsky (D-IL) also made recommendations Bipartisan Policy Center Debt Reduction Taskforce known as Rivlin/Domenici 31
Specific Proposals: Benefit Cuts 32
Proposal 1: Change the Benefit Formula Achieve program savings by changing the replacement percentages in the benefit formula Can be done: Progressively: Change the replacement percentages for top earners only (i.e., decrease the percentage) Regressively: Change the replacement percentages for all earners 33
Proposal Specifics: Bowles/Simpson Bowles/Simpson (new formula) $0-$9,000 = 90% replacement $9,000 - $38,000 = 30% $38,000 - $64,000 = 10% $64,000 - max = 5% Based on annual earnings rather than AIME Results in benefit cuts for everyone with average annual earnings over $9,000 Restores 0.86% of taxable payroll or 39% of shortfall 34
Proposal Specifics: Rivlin/Domenici Rivlin/Domenici (new formula) $0-$749 = 90% replacement $749 - $4,517 = 32% $4,517 - max = 10% Results in benefit cuts only for those beneficiaries with average monthly earnings over $4,517 ($54,204/year) Restores 0.07% of payroll or 3.2% of shortfall 35
Impact on People with Any change to the benefit formula that decreases the replacement percentages will result in benefit cuts to people with disabilities in all benefit programs retirement, disability, survivors 36
Other Possible Formula Changes Resulting in Benefit Cuts Increase the number of years used in calculating the AIME Change from wage indexing to price indexing when calculating the AIME Not included in proposals discussed today 37
Proposal 2: Change the Retirement Age Current FRA (full retirement age) 66 for current retirees up from 65 Under current law, gradually being raised to 67 for all people born after 1960 Current ERA (early retirement age) 62 for all retirees Not set to increase under current law 38
Bowles/Simpson Proposal Specifics Raise NRA to 68 by 2050 and 69 by 2075 Raise ERA to 63 by 2075 Restores 0.34% of taxable payroll or 15.3% of shortfall Rivlin/Domenici Does not include an increase in the retirement age per se Indexes new benefits for longevity instead Replacement rate will be 99.7% of benefits the year before Restores 0.48% of taxable payroll or 21.6% of shortfall 39
Raising the Retirement Age Is a Benefit Cut 40
Impact on People with Benefit cut for workers with disabilities who work until they reach retirement age or who retire early Benefit cut for people receiving family benefits from a retired worker 41
Impact on People with (continued) No direct effect on people receiving benefits under disability program but: Disability applications already increasing due to current law increase in retirement age Raising the ERA: Leaves people with disabilities in their early 60s, but who do not meet the stringent requirements for Disability Insurance (DI) program, without Social Security insurance coverage Will cause more workers to apply for DI benefits Will increase the administrative workload, processing time for disability applications, and delay in benefit awards 42
Proposal 3: Change the Cost of Living Adjustment Formula Current law provides for an annual Cost of Living Adjustment or COLA for benefits under all programs Helps protect the value of benefits against inflation Current COLA is based on the change in the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Worker) There was no COLA for 2010 or 2011 43
Proposal 3: Cost of Living Adjustment Formula (cont) Reform proponents argue that the current measure overstates inflation Propose to change to another measure known as the chained CPI Generally finds a smaller increase in the cost of living year to year Bases its rate on substitution effect When prices on a particular item go up, people will substitute other less expensive items in their place (e.g. if steak prices rise, a person will buy hamburger instead) 44
Proposal Specifics Bowles/Simpson Change to Chained CPI Restores 0.50% taxable payroll or 22% of shortfall Rivlin/Domenici Change to Chained CPI Restores 0.49% taxable payroll or 22% of shortfall 45
Why the Chained CPI Is Not More Accurate More applicable to higher income earners Can t substitute hamburger for steak if already only eating hamburger or no meat Not applicable to many seniors or people with disabilities Majority of expenses are to meet basic needs Underestimates expenses like medical care on which people with disabilities and seniors spend a larger percentage of their income 46
Impact on People with Change in COLA will result in a benefit cut for all people receiving benefits under all Social Security programs Effect is cumulative The longer a person receives benefits the greater the benefit cut will be People receiving disability benefits tend to receive benefits longer than people who receive benefits under other programs Value of benefits no longer adequately protected from inflation 47
Proposals to Address Long-Term Solvency: Revenue Enhancements 48
Current Revenue Design Almost every worker pays in some state and local workers do not Current FICA Tax Rate: 12.4% of earnings 6.2% paid by employee 6.2% paid by employer Earnings taxed are capped at $106,800 adjusted annually Only earnings in the form of wages are taxed dividends and capital gains are not 49
Interest Revenue Two sources of revenue to the Social Security Trust Funds: FICA Taxes Interest earned on money in Trust Funds Trust Funds invested in U.S. Treasury bonds Steady return with no risk May 2011 50
Proposal 1: Raise or eliminate the cap on earnings Historically, 90% of total earnings have been taxed Currently, only about 83% of earnings taxed Lower percentage due in large part to earnings cap amount increases lagging behind growth in income of high earners 51
Proposal Specifics Phase in increase in cap to capture 90% of wages Bowles/Simpson by 2050 Restores 0.67% of payroll or 30.2% of shortfall Rivlin/Domenici over 38 years Restores 0.60% of payroll or 27% of shortfall 52
Proposal Specifics (continued) Eliminate cap on employers and keep cap for employees the same Rep. Schakowsky 74% of shortfall eliminated based on 2010 Trustees Report (not provided as percent of payroll) 53
Proposal 2: Increase FICA Rates Current Rate: 12.4% (6.2% employee; 6.2% employer) Immediately increase by 1.1% on each 7.3% each Restores 2.09% of payroll or 94.1% of shortfall Medium earner with $43,451 annual earnings increase of $478 a year or $9.19/week Not included in any current proposal 54
Proposal 2: Increase FICA Rates (continued) Gradually increase by 1% over 20 years starting in 2015 7.2% each by 2035 Restores 1.39% of taxable payroll or 63% of shortfall Average earner in 2015 with $53,085 annual earnings increase of $26.50 a year or $.50/week Not included in any current proposal 55
Proposal 3: Require Uncovered Workers to Contribute Almost all U.S. workers pay into the Social Security system Currently 8 states have more than half their state and local workers not covered by the Social Security system and who don t pay FICA contributions Are covered by public pensions instead 56
Proposal Specifics Have all newly hired state and local workers be covered and pay in Bowles/Simpson by 2020 Restores 0.16% of payroll or 7.2% of shortfall Rivlin/Domenici by 2020 Restores 0.16% of payroll or 7.2% of shortfall Note: in 75 th year would be -.12% of payroll when state and local workers begin to collect benefits 57
Proposal 4: Eliminate tax free status of cafeteria plans People currently pay FICA taxes on 401(k) contributions but not on flexible spending accounts Health Savings Account Dependent Care Savings Account Transit Savings Accounts 58
Proposal Specifics Rep. Schakowsky - Require employees and employers to pay FICA taxes on all flexible savings account contributions Restores 0.25% of payroll or 11.26% of the shortfall 59
Revenue Changes: Impact on People with Workers with disabilities would have less take home pay if: FICA rates for employees increased They have earnings above current taxable maximums and the cap is raised No direct impact on people with disabilities receiving benefits under any of the Social Security programs 60
Principles for Achieving Long-Term Solvency of the Social Security Programs 61
General Principles Social Security is NOT in crisis Social Security changes should not be included in deficit reduction legislation The Social Security programs should not be included in proposals that cap overall federal spending Modest premium contribution adjustments, rather than benefit cuts, should be used to address longterm solvency of the Social Security programs 62
Principles (continued) Do not change basic design based on payroll taxes Preserve as social insurance for disability, survivors & retirement Guarantee monthly benefits adjusted for inflation Preserve current & future benefits Restore program s long term funding 63
For More Information To find fact sheets regarding Social Security and disability, links to helpful resources, or to access a recording of this webinar, please visit www.disabilityandsocialsecurity.org 64
Webinar Sponsors This webinar has been sponsored by the. Funding was provided through a grant administered by the National Academy of Social Insurance and provided by the Ford Foundation. 65