Friday, February 02, 2007

[Press Release] Minimum Benefits in Social Security

from The Urban Institute

Author(s): Melissa Favreault, Gordon Mermin, C. Eugene Steuerle
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in PDF Format.

The text below is a portion of the complete document.

Abstract
In light of Social Security reform proposals that include provisions for minimum benefits, this paper considers the redistributive purpose of Social Security and whether a minimum benefit may reduce need among aged and disabled people more equitably or efficiently than current law structures. We then examine several minimum benefit designs. We find that minimum benefits could help reduce poverty among the aged substantially, even in the context of benefit reductions to improve the program's long-term fiscal deficit. However, trade-offs exist; generous minimums could reduce Social Security's earnings relationship, which has helped the program garner strong political support.

Introduction
In 1998, the bipartisan National Commission on Retirement Policy advanced a reform proposal that contained a minimum benefit within Social Security. Since then, numerous congressional proposals have included minimum benefits as part of a package of reforms, and a commission President George W. Bush set up during his first term also recommended one. Little effort, however, has been made to develop the rationale for a minimum benefit or to examine alternative designs. As a consequence, the design of a minimum benefit—or, for that matter, of almost all redistributive formulas within Social Security—has seldom been based on any theoretical or empirical notion of exactly what goals are sought and what types of formulaic adjustments would best achieve them.

This study attempts to fill that gap. It has three main sections. In the first, we examine Social Security's redistributive purpose and how it relates to the program's other purposes. We discuss the current system's redistributive features, and consider whether a minimum benefit might improve program adequacy in a more equitable or efficient way. We also consider an alternative: increasing the basic means-tested program that provides an income floor for the aged and disabled.

With this theoretical context in mind, we turn to the second section, in which we design a few minimum benefits based on years of work and the poverty threshold. In this section, we consider how Social Security currently treats low-wage workers, review literature on minimum benefits, and examine benefit design elements. Our benefit design draws from the principles outlined above, as well as from empirical research about distributions of numbers of years in covered employment for men and women.

In the third section, we empirically examine how well different types of minimum benefits achieve various goals, such as reducing poverty. We compare the minimums with similar mechanisms (for example, changes to the benefit formula bend points). We use DYNASIM, the Urban Institute's dynamic microsimulation model of the U.S. population (Favreault and Smith 2004), in these analyses. Our aim is not to reach a definitive conclusion about how minimum benefits should be designed but rather to show how certain Social Security purposes—particularly those associated with poverty relief—can be better achieved when they are solidly grounded in thoughtful analysis and empirical research.

We make roughly fiscally equivalent comparisons assuming a system that is reduced relative to scheduled benefits because of Social Security's long-term fiscal deficit (OASDI Board of Trustees 2005). We assume that increased contributions meet approximately half of Social Security's annual deficit in 2050, and benefit reductions meet the other half. These estimated reductions, based on Social Security cost projections, are inherently uncertain. Social Security may require smaller or greater adjustments depending on how accurate these predictions turn out to be. Nonetheless, this is a reasonable starting place.

This report is available in its entirety in PDF Format.

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