Research Looks at Ways To Protect Vulnerable Elderly From Social Security Changes

from The Urban Institute

Stu Kantor

With Social Security's trust funds facing depletion by 2040, many observers suggest partly addressing the projected deficit by raising the age at which workers can first receive retirement benefits. While a higher retirement age would bolster the system by reducing benefits and encouraging people to work longer, would it disproportionately hurt vulnerable populations, who generally do not live as long as other retirees and typically depend more on Social Security?

New research from the Urban Institute's Retirement Policy Project says lifetime benefits for all groups would be lower, but less so for those with lower lifetime earnings and less education. The policy change would not disproportionately hit lower-income groups because the Social Security disability program provides some protection. High school dropouts, African Americans, and workers in the lowest fifth of earners are more likely to get disability payments than are college graduates, whites, and workers in the top fifth. Changes in the retirement age do not affect when disabled workers can apply for benefits or the amounts they can receive.

In "Would Raising the Social Security Retirement Age Harm Low-Income Groups?" Gordon B. T. Mermin and C. Eugene Steuerle look at what happens if the normal retirement age is increased to 69 years and 8 months (it is currently 66 years and scheduled to go to 67 for workers who reach age 62 by 2022). Lifetime benefits for today's young workers, they found, would decline to 90 percent of the levels scheduled under current rules. High school dropouts would experience an 8 percent drop, compared with 11 percent for college graduates. Workers in the bottom fifth of earners would see a 6 percent drop, compared with 13 percent for those in the top fifth.

While boosting the retirement age would not hit lower-income groups harder than others, it would push more retirees into poverty. Raising the age would increase the share of retirees with incomes below the wage-indexed poverty level in 2050 from 14.4 percent under the current system to 16.2 percent, an increase of 1.5 million people.

Adding a floor to Social Security could mitigate the impact on vulnerable groups of an older retirement age. Under one scenario Mermin and Steuerle examined, a minimum benefit in conjunction with a higher age would minimize the new policy's effect on poverty compared with current law, raising lifetime benefits for workers in the bottom fifth of earners by 6 percent. The cost of the minimum could be paid for by raising the normal retirement age by another six months (to 70 years and 2 months).

"These findings demonstrate the importance of evaluating policies as part of larger packages rather than in isolation," said Mermin. "A policy that, in one form, achieves certain desirable goals yet harms at-risk groups can be made more acceptable and effective when combined with other reforms."
Minimum Retirement Benefits

The Mermin-Steuerle report is one of five research briefs released today that assess the impact of raising the retirement age, ways to ameliorate its fallout for vulnerable populations, and boomers' plans to work beyond age 65.

"Minimum Benefits in Social Security: Design Details Matter," by Melissa M. Favreault, Gordon Mermin, and Eugene Steuerle, analyzes five minimum-benefit designs and shows how they could help reduce elderly poverty. They found

* Many minimum-benefit arrangements would lose value if not tied to wage growth.
* Approaches that best alleviate poverty tend to reward work less.
* Designs that do not take into account the truncated work histories of disabled workers will have less success at reducing poverty.
* Different approaches to cutting Social Security benefits—such as across-the-board reductions versus changes to cost-of-living adjustments—have distinct implications, both on their own and when combined with a minimum.

Almost 8 percent of Social Security beneficiaries 65 and older had incomes below the poverty line in 2004, according to the Social Security Administration. That figure jumps to 17 percent among unmarried older women, 24 percent for African Americans, and 19 percent for Hispanics.

"Minimum Benefits in Social Security Could Reduce Aged Poverty," by Melissa Favreault, Gordon Mermin, Eugene Steuerle, and Dan Murphy, looks at two scenarios involving minimum benefits funded with across-the-board benefit cuts to address Social Security's long-term financing problem. A generous minimum that increases over time with average wages would see poverty among elderly African Americans in 2050 decline to 2.9 percent, compared with 6.2 percent under current-law scheduled benefits. Such a minimum would cut poverty rates nearly in half for older Hispanics and unmarried women.
Retirement Plans

The solvency of the U.S. retirement system partially hinges on how long baby boomers stay in the workforce. If they retire as early as their parents, the number of workers per retiree will soon plummet, reducing the tax base and squeezing budgets for Social Security and all other government programs.

But "How Long Do Boomers Plan to Work?" by Gordon Mermin, Richard W. Johnson, and Dan Murphy, offers some encouraging signs. Using data from the Health and Retirement Study, a national survey of older Americans funded by the National Institute on Aging, the researchers found that as boomers approach retirement, they intend to work longer than people born a dozen years earlier did, a shift that will help promote economic growth and partly offset the economic pressures created by an aging population.

Among workers ages 51 to 56 in 2004, 51 percent said they expect to work past age 62, up from 47 percent among comparable workers in 1992. The probability of working full-time past age 65 increased faster, growing from 27 to 33 percent. The declining availability of retiree health benefits, increasing levels of educational attainment, and falling traditional pension coverage accounted for most of the increase in work expectations.

Although 50-something African Americans plan to work longer than they did a decade ago, they lag behind other racial and ethnic groups, Dan Murphy, Richard Johnson, and Gordon Mermin indicate in "Racial Differences in Baby Boomers' Retirement Expectations." Twenty-eight percent of African-American boomers said they expect to work full-time past age 65, as opposed to 33 percent for all other racial groups.

While education, health status, wages, and wealth generally affect retirement plans—less-educated racial groups, for example, are more likely to be in physically demanding jobs that become difficult for older workers—racial differences in these factors do not explain African Americans' early retirement plans. Labor market discrimination, family care responsibilities, and cultural differences may play a more important role in their later-life work decisions.
Reading the Reports

* "Would Raising the Social Security Retirement Age Harm Low-Income Groups?" is available at http://www.urban.org/url.cfm?id=311413.
* "Minimum Benefits in Social Security: Design Details Matter" can be found at http://www.urban.org/url.cfm?id=311417.
* "Minimum Benefits in Social Security Could Reduce Aged Poverty" can be accessed at http://www.urban.org/url.cfm?id=311416.
* "How Long Do Boomers Plan to Work?" can be read at http://www.urban.org/url.cfm?id=311415.
* "Racial Differences in Baby Boomers' Retirement Expectations" is available at http://www.urban.org/url.cfm?id=311414.