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@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@nasi.org or at (202)452-8097.
Viewpoints in this section solely represent the authors’ opinions and not the opinions of "Spotlight on Poverty and Opportunity."