By Ben Veghte, Income Security Research Associate, and Virginia P. Reno, Vice President for Income Security, National Academy of Social Insurance (NASI), Posted May 24, 2010, Cross-posted from SpotlightOnPoverty.org
As the deficit commission considers ways to reform the federal budget, it’s worth taking a moment to look at the sometimes underestimated functions of Social Security. By providing life insurance, disability insurance, and old-age income protection to nearly all Americans, Social Security mitigates some of our society’s most severe poverty risks. It does so with far lower administrative costs than private insurance and with guaranteed benefits that are immune to fluctuations in the stock market. About 99 cents of each dollar of Social Security spending goes to benefits—less than one cent goes to administration. Because it works so well and covers virtually everyone, and because many of us don’t appreciate the program until we need it, we sometimes overlook its success in reducing poverty.
Preventing poverty among working families
The risk of disability or early death is much greater than most people realize. About 39 percent of young men and 31 percent of young women will die or become disabled before they reach retirement age, according to the Social Security actuaries. Social Security’s life and disability insurance helps prevent poverty among families that suffer these losses. For example, a 30-year-old worker earning about $27,000 to $33,000 in 2008 with a spouse and two young children had Social Security disability and life insurance protection valued at over $450,000 each. According to the Social Security Administration’s 2010 monthly benefit statistics, the average benefit of a disabled worker with a young spouse and one or more children was $1,797 in January 2010, while the average for a widowed mother with two children was $2,404. These social insurance protections are not extravagant, but by being reliable and secure, they constitute a bulwark against impoverishment.
In all, about 6.5 million children under 18 receive part of their family income from Social Security. The benefits lifted 1.3 million children out of poverty and reduced the degree of poverty experienced by another 1.5 million children in 2005, according to NASI’s 2008 brief, Children’s Stake in Social Security. Because African-American and Hispanic-American families face a greater risk of losing a parent’s income due to death or disability, Social Security’s family protections are particularly important to these communities.
Reducing poverty among the elderly
Social Security has been instrumental in reducing the historically high levels of poverty among U.S. elders. The Census Bureau began measuring poverty in 1959. The share of elders counted as poor fell from 35 percent in that year to 15 percent in 1975, to about 10 percent in 2000, where it has hovered ever since. In their 2006 article “Social Security and the Evolution of Elderly Poverty,” Gary Engelhardt and Jonathan Gruber found that increases in Social Security coverage and benefits between 1967 and 2000 can explain all of the decline in elderly poverty over this period. They concluded that this income adequacy has led some elderly to live independently rather than with family members, and that the effect of Social Security in reducing poverty would have been even more dramatic in the absence of these changes in living arrangements. While about one in ten elders is poor, many more elders have incomes just above the poverty threshold. Elders with incomes below 125 percent of the poverty threshold are characterized as “near poor.” A total of 28 percent of elderly unmarried women were poor or near poor in 2007, as were 33 percent of African-American and 28 percent of Latino elders. More than 80 percent of older African Americans and more than 75 percent of elderly Latinos rely on Social Security for more than half their income, according to the Insight Center for Community Economic Development. Still, the average Social Security retirement benefit is modest, at $1,168 per month or about $14,000 per year. Moreover, poverty in old age is, in large part, a women’s issue, for roughly seven out of ten elderly poor and near-poor are female.
The case for improving Social Security
Benefits are modest. If one takes into account out-of-pocket medical costs and other living expenses included in the Census Bureau’s new Supplemental Poverty Measure, not ten but nearly 20 percent of seniors are poor. Thus Social Security benefits today are at best modest, and arguably in need of improvement.
Benefits will be less adequate in the future. Moreover, benefits will be less adequate for future retirees than they are today for two reasons. First, Medicare premiums that are taken directly out of benefits will take a bigger bite in the future because those premiums go up with the cost of health care, which will rise faster than Social Security benefits. Second, in 1983 Congress scheduled a staged increase to the age for receiving full Social Security benefits—from 65 to 67. That change gradually lowers benefits regardless of the age at which they are claimed. For a median earner retiring at 65 in 2005, benefits after Medicare premiums replaced about 39 percent of prior earnings. That replacement rate will fall to 32 percent by 2030, a reduction of nearly one-fifth when benefit reductions due to the 1983 amendments are fully phased in. Going forward, benefit improvements would be needed just to maintain the modest replacement rates retirees have experienced over the past 25-30 years.
Pensions, savings, and housing values are less secure. Finally, by exposing Americans to the volatility of equity and housing assets, the financial crisis has shone a new light on the critical role of Social Security. The erosion of private pensions, decline in the value of savings accounts, and losses in home equity have rendered those who will retire over the next two decades much more reliant on Social Security.
Options to improve benefits deserve attention. As Americans consider ways to balance Social Security’s long-term finances, we should include policies to strengthen benefits where they fall short, particularly for certain demographic groups—the very old, particularly widows; those who have gaps in their earnings record due to child-care responsibilities; those who have worked many years at low wages; and children of deceased or disabled breadwinners who aspire to a college education. Options to improve benefits and the cost of doing so are covered in the NASI report, Fixing Social Security: Adequate Benefits, Adequate Finances. A recent poll cosponsored by NASI and the Rockefeller Foundation finds that Americans value Social Security, are willing to pay for it, and want to improve benefits for vulnerable groups: see Economic Crisis Fuels Support for Social Security: Views of the American Public.
For those of us committed to alleviating poverty, improving Social Security promises to be an effective strategy.
Ben Veghte is Income Security Research Associate at the National Academy of Social Insurance. He can be reached at bveghte [at] nasi.org or at (202)452-8097.
Virginia P. Reno is Vice President for Income Security at the National Academy of Social Insurance. She can be reached at Vreno [at] nasi.org or at (202)452-8097.