What Social Workers Need to Know About Social Security Reform

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What Social Workers Need to Know About Social
Security Reform
SAGE-SW Faculty Development Institute
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Social Security reform requires knowledge of

• The origins of Social Security
• The strengths of Social Security
• The current financing problems
• The implications of various reform options
• The values at stake in the debate

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BACKGROUND WHAT IS SOCIAL INSURANCE?

• DEFINITION OF TERMS
• EMERGENCE OF SOCIAL INSURANCE
• DEVELOPMENT IN THE U.S.
• SETTING THE STAGE 1900 TO MID 1930S
• INCREMENTAL EXPANSION 1939 -1975
• FINANCING DOMINATES THE AGENDA MID 1970S TO
  TODAY
• A NEW DEBATE

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EVOLUTION OF SOCIAL INSURANCE

• ECONOMIC GROWTH
• CAN AFFORD DEPENDENCY
• WORK/LEISURE ALLOCATIONS
• INCREASED NEED FOR PUBLIC SUPPORT
• WAGE DEPENDENT
• DEMOGRAPHIC CHANGES
• NEW RISKS EMERGE
• ON THE JOB INJURY
• UNEMPLOYMENT
• OLD AGE

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The door to the poor house
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EARLY DEVELOPMENTS 1900 TO MID-1930s

• SOCIAL INSURANCE PUBLIC PENSIONS
• WORKER COMPENSATION
• BARRIERS TO SOCIAL INSURANCE
• FEDERALISM/STATE DOMINATION IN SOCIAL WELFARE
• STATE RIGHTS CONCERNS
• INDIVIDUALISM
• VOLUNTARY TRADITION
• LACK OF SOCIAL DEMOCRATIC TRADITION
• NO TRADITION OF A PATERNALISTIC ARISTOCRACY
• THE SOCIAL SECURITY ACT OF 1935

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Frances Perkins FDR Signing the 1935 Social
Security Act
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Incremental Expansion 1939 to Mid - 1970s

• 1939, 1950, 1956, 1965, 1972
• Programs Benefits added
• Benefit amounts increased
• Strong favorable Consensus

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Disability Insurance added in 1956
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LBJ signs Medicare Law - 1965
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Marketing Medicare in 1965
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Financing Issues Dominate the Agenda 1975

• 1977 legislation
• 1983 legislation
• Emergence of Generational Equity Challenge
• Aging of Baby Boom
• Federal Deficit
• A Changed Debate Legitimization of radical
  change
• means testing
• privatization
• the 2000 presidential election
• Presidents Commission to Strengthen Social
  Security

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To understand the future of Social Security, we
must first clarify whats at stake
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THE VALUE OF SOCIAL SECURITY

• Inflation protection
• Life Insurance
• 403,000 for a young family
• Disability Insurance
• 208,000 for a young family
• Portable Retirement protection
• Only plan for 6 out of 10 private sector
  employees
• Progressive benefit structure
• Freeing up the generation in the middle to
  concentrate resources on their children

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45.5 Million Beneficiaries in 2001
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BENEFITS-JANUARY 2002

• AVERAGE BENEFITS
• 852 FOR RETIRED WORKERS
• 794 Disabled Workers
• 1,418 FOR AGED COUPLE
• 820 FOR AGED WIDOW(ER)
• 1,719 WIDOWED MOTHER WITH 2 KIDS
• 1,325 DISABLED WORKER, SPOUSE KIDS
• MAXIMUM BENEFIT
• 1,660 FOR WORKER RETIRING AT 65

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TILT IN THE BENEFIT FORMULA (2002)

• Giving expression to dual goals of adequacy and
  individual equity
• 90 of first 592
• 32 of next 2,975
• 15 of excess
• Proportionately larger benefits for low income
  persons
• But larger benefit amounts for those who pay more
  into the program

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Importance of various sources of income to
elderly households by quintiles, 1998

• _______________
• ___QUINTILES_________________
• All Units
• Aged Under 8793-
  14,224- 22,255- 37,962
• Units 8792 14,223
  22,254 37,961 and over
• 
  (Q1) (Q2) (Q3) (Q4)
  (Q5)
• Percent of Total Income From
• __________________________________________________
  _______________________
• Social Security 40.3 82.1 80.5 63.8 45.2 18.3
• Government pension 8.1 0.8 2.1 5.5 10.4 9.9
• Private pension/annuity 9.9
  2.0 3.9 8.8 12.9 10.3
• Income from assets 18.0 2.4 6.1 10.5 13.7 27.9
• Earnings 20.0 0.7 3.2 7.3 13.1 31.1
• Public Cash Assistance 0.7 9.8 1.8
  0.7 0.2 0.0
• ________________________________________________
  ________________________

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Multiple Goals Assessment of Fairness

• Adequacy
• Social goals
• Individual equity/rate of return
• Human Dignity
• Stable financing

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THE VALUES SERVED BY SOCIAL SECURITY The moral
basis

• An Expression of Community
• Mutual Aid Self-Help
• Concern for Neighbors
• Dignity
• Compact Between Generations
• Compact Between Citizenry Government

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FINANCING SOCIAL SECURITY
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FINANCING SOCIAL SECURITY (Calendar year 2002
estimates)

• Payroll Taxes 531 billion
• 6.2 payroll tax on employees employers
• 84,900 ceiling in 2002
• Taxation of benefits 14 billion
• Trust Fund Investments 80 billion
• 155 million taxpayers
• Receipts 624 billion
• Disbursements 465 billion
• Surplus 159 billion
• Trust Fund Assets 1.37 trillion at years end
• Administrative costs 0.9

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The Financing Problem-2002

• Is real
• Is Manageable
• Should not be ignored
• Should not be exaggerated
• Does not require radical change
• A roughly 14 shortfall over 75 years (1.87 of
  taxable payroll)
• Sufficient funds anticipated to meet obligations
  until 2041
• A projected 27 yearly shortfall after 2041,
  assuming no legislative change

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What is causing the financing problem?
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Causes of the financing problem?

• Changing Demographics
• The Aging of the Baby Boom
• Mortality improvements
• Low fertility rates
• Changes in actuarial assumptions
• Real wage growth
• Mortality
• Improved method of estimating value of benefits

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Total Number of Persons Supported by Each Worker
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REASONS TO STRENGTHEN THE EXISTING SYSTEM

• It works - nothing provides more widespread or
  more reliable protection
• Important protections for young families
• Major building block for retirement
• Inflation protection
• Gives expression to important societal values
• Facing a manageable problem, not a crisis
• Other reasonable reform options exist
• Radical change would undermine the political
  support and adequacy goals of the program

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The Choices
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The Bush Administration Advocates Partial
Privatization

• Some proposals would let workers contribute 2
  into personal accounts instead of Social Security
  The Administration says this would be done
  without increasing taxes or cutting benefits on
  seniors or older workers.Whats left? Benefit
  cuts for todays young.

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The Bush Administration Advocates Partial
Privatization

• but
• The Administration does not specify how to pay
  for private accounts without large increases in
  the projected deficit and/or very large benefit
  cuts on young workers

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PROBLEMS WITH PRIVATIZING

• Transition costs large benefit reductions, tax
  increases possibly borrowing
• Administrative costs fees
• Exacerbates inequalities and uncertainties
• Shifts risks from government to individuals
• Market volatility
• Negative interactions with employer pensions

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PROBLEMS WITH PRIVATIZING

• Special risks for low moderate income
• Inflation risks
• Undermines political support for redistributive
  goals
• Risk that a Congress will allow accumulations to
  be used for non retirement purposes
• Interactions of politics financial markets

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Many reasonable solutions

• all require some pain
• no need for radical change

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FOR EXAMPLE, HERES ONE SET OF PROPOSALS THAT
COULD ADDRESS THE PROBLEM (rough estimate of of
Problem Solved)

• Cover New State Local Employees (11)
• Compute benefits over 38 years (13)
• Tax benefits like contributory private pension
  benefit plans and phase out thresholds
  (25,000/32,000) for taxation of benefits (16)
• Increase taxable earnings ceiling by about 18
  (19)
• Invest 40 of trust fund assets in equities (43)
  

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OTHER SOCIAL SECURITY REFORM OPTIONS (rough
estimate of of Problem Solved)

• Index National Retirement Age to increases in
  longevity after 2026 (14)
• Apply Social Security tax to employers entire
  payroll (50)
• Increase payroll tax by 0.50 on both employer
  employee, in 2020 (25)
• Maintain real benefit values, but gradually cut
  replacement rates by 5 (16)
• Accelerate National Retirement Age increase to
  age 68 by 2020 (25)
• Revise Cost of Living Adjustment (COLA) as the
  Consumer Price Index (CPI) overstates inflation
• (e.g. 0.3 reduction addresses 20 of problem)

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Consider

• Trade-offs
• Every option distributes pain
• How do vulnerable groups fare?
• Whats fair?
• Whats politically feasible?
• Which groups are at greatest risk?
• How should the problems of older women be
  addressed?

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In addressing the financing problem, recognize

• Who wins loses
• Risks to most vulnerable
• Diversity of Baby Boom
• Need to spread the pain
• Cross-generational implications
• Value of universal protection
• Moral Basis of Social Security

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