Reforming Social Security to Increase Retirement Income

Witnesses at a Senate hearing discussed Social Security reforms that could boost potential retirement income for workers.

During the hearing, “The Strengthening Social Security to Meet the Needs of Tomorrow’s Retirees,” before the U.S. Senate Committee on Finance’s Subcommittee on Social Security, Pensions and Family Policy, Teresa Ghilarducci, chair of the Economics Department at the New School for Social Research in New York, New York, noted low and middle-income individuals are particularly vulnerable to low levels of retirement readiness, pointing out that these individuals are “more likely to take loans from their 401(k) or withdraw monies from their 401(k) or individual retirement account (IRA).” Ghilarducci also noted workers in these income ranges also tend to have more conservative investment portfolios that produce lower returns.

Age also seems to play a role in low levels of retirement readiness, with younger workers (ages 20 to 39) more likely to cash out their retirement balance than their older counterparts. “Forty percent of these workers cash out to a large loss,” she said.

Maya Rockeymoore, president and CEO of the Center for Global Policy Solutions in Washington, D.C., testified that she foresees a greater dependence on Social Security for retirement income, with “a majority of the nation’s workers continuing to rely on Social Security for much of their retirement income well into the future,” while at the same time the program’s benefits remain modest. Efforts to strengthen Social Security should not only focus on the program’s solvency, she said, but also consider how to increase the adequacy of benefits for vulnerable populations.

To that end, Rockeymoore recommended increasing benefits for the very old, increasing benefits for widowed spouses, increasing benefits for very low income workers, providing “across the board” benefit increases for all beneficiaries, and adopting a better cost-of-living adjustment (COLA) measure.

She suggested increasing benefits by a uniform dollar amount or by 5% for beneficiaries age 85 and older, and increasing benefits for surviving spouses to 75% of the sum of worker benefits received by the couple with a cap not to exceed the average earnings of one person or not to exceed the maximum earnings of one person that taxed and counted for Social Security. To address very low income workers, she suggested updating a special minimum benefit to 125% of the current poverty threshold and increasing benefits for single retirees at retirement and/or upon reaching the age of 85. She also suggested benefits be increased to meet the projected income needs of future retirees who have been harmed by macroeconomic factors beyond their control, such as stagnating wages and the recession. Finally, Rockeymoore suggested the Social Security system start using the consumer price index-elderly (CPI-E) as a more accurate means of determining annual COLAs, since it will factor in added costs such as those for health care.

Considering that individuals are living longer and many are working longer to make up for inadequate retirement savings, Jason J. Fichtner, senior research fellow at the Mercatus Center at George Mason University in Arlington, Virginia, suggested removing obstacles that discourage older Americans from remaining in the work force longer, such as increasing the special minimum benefit given to older Americans, raising the eligibility age, increasing the delayed retirement credit, and adjusting the benefit formula. He also suggested improving the financial literacy of workers.

Fichtner suggested raising the age workers are first eligible for benefits to 65, rather than 62. This would necessarily delay many claims and correlate with continued employment. Similarly, he suggested that increasing Social Security’s delayed retirement credit could result in “another positive work incentive.”

Fichtner also suggested a redesign to the benefits formula that would operate on each separate year of work rather than on one’s career average earnings. He pointed out that the current formula causes one’s returns from Social Security to drop with extended work, as one’s career average earnings rise and the system’s progressive benefit formula thus delivers lower returns.

On the subject of financial literacy, Fichtner testified, “Although people are living longer, a significant fraction of workers continues to start receiving Social Security benefits early, though this permanently reduces monthly benefits. Research links financial literacy and saving behavior, indicating that the less financially literate are also less likely to plan for retirement. Better informing people about the full costs of claiming benefits early may lead to more people choosing to delay claiming until the full retirement age, or longer, thus improving labor-force participation among seniors.”

Stephen Goss, chief actuary for the Social Security Administration in Baltimore, Maryland, said, Social Security reform is urgently needed, especially with retirees “increasingly at risk for having no other income than Social Security benefits.”

Goss noted that while certain career earners may have Social Security benefits as high as 70% of career average earnings, such individuals “tend to be far more dependent on Social Security as a sole source of retirement income,” adding that “about one-third of Social Security beneficiaries have little if any income outside of that provided by Social Security.”

According to Goss, any solutions to issues with the future of Social Security, and all sources of retirement income, need to address the aging of the population and the adequacy of monthly Social Security benefits in light of this aging.

More information about the hearing, including copies of the testimonies, is available here.