RETIREMENT RESEARCH January 2019, Number 19-2 MODERNIZING SOCIAL SECURITY: MINIMUM BENEFITS By Andrew D. Eschtruth and Alicia H. Munnell* Introduction Social Security offers a minimum benefit to retired minimum benefit has wide appeal and could sub- workers with very low career earnings. However, the stantially reduce poverty risk, with the breadth of the current level of this benefit is not enough, by itself, impact dependent on how eligibility is determined. to prevent poverty even for full-career workers, and it is withering away due to a design flaw. As a result, many policy experts support redesigning the mini- Social Security Benefits for mum benefit. Virtually all experts agree that full-career workers Low Earners should get a benefit that keeps them out of poverty. This section describes Social Security’s current provi- Some also support broadening eligibility for the mini- sions for low earners, particularly the minimum ben- mum benefit by reducing the earnings level needed efit, and explains the rationale for a new minimum to build up qualifying credits. Others would take benefit to help reduce poverty. the opposite tack, narrowing eligibility by raising the number of years needed for a full or partial benefit. This brief is the final one in a series on moderniz- Provisions for Low Earners ing Social Security to account for changing social, eco- nomic, and demographic circumstances. The discus- Social Security’s standard benefit formula that applies sion proceeds as follows. The first section provides to all workers provides low-income workers with the basics on Social Security benefits for low earners. higher benefits relative to their earnings than middle- The second section introduces the key design ele- and high-income workers. It also limits the number ments of the current minimum benefit. The third of years of earnings counted in the benefit formula to section reviews several reform proposals. The fourth 35, which helps those who do not have a longer work section assesses the reforms based on three criteria: history. However, these provisions do not ensure a targeting efficiency, administrative feasibility, and cost specific minimum standard of living, which is par- offsets. The final section concludes that an enhanced ticularly important for low-income retirees who are * Andrew D. Eschtruth is associate director for external relations at the Center for Retirement Research at Boston College (CRR). Alicia H. Munnell is director of the CRR and the Peter F. Drucker Professor of Management Sciences at Boston Col- lege’s Carroll School of Management. The authors thank the AARP Public Policy Institute for helpful comments and Anqi Chen for excellent research assistance. The CRR gratefully acknowledges AARP for its support of this series of briefs. 2 Center for Retirement Research heavily dependent on Social Security. For this reason, Figure 1. Number of Social Security Beneficiaries the program includes a minimum benefit (techni- Receiving the Minimum Benefit, 1999-2017 cally called the “special minimum benefit”) that was 150,000 originally intended to provide a floor for those who would otherwise receive very low benefits under the standard formula.1   100,000 The Current Minimum Benefit To be eligible for the minimum benefit, a person must have worked at least 11 years with earnings at or 50,000 above a set amount. In 2019, this earnings threshold is $14,805, which is higher than the level required to qualify for earnings credits under the standard Social Security benefit formula.2 The annual monthly mini- 0 1999 2002 2005 2008 2011 2014 2017 mum benefit for an eligible worker retiring in 2019 with an 11-year work history is $500; the amount Source: U.S. Social Security Administration (2000-2018). rises proportionately for each additional year worked, reaching the full minimum benefit of about $10,500 at 30 years. As with standard Social Security benefits, households receiving Social Security worker benefits the minimum benefit is reduced if claimed before the were in poverty in 2017 and an additional 15.6 percent full retirement age (FRA).3 A key design difference had incomes of less than 125 percent of the poverty between the minimum and standard benefits is that level (see Figure 2). And these numbers are for the the minimum benefit amount is based strictly on the standard poverty measure, which many believe under- number of years worked rather than being linked to states the problem.6 So, while the current minimum each worker’s lifetime earnings. benefit is going away, the need for an adequate floor For individuals who are eligible for the minimum of protection is not.7 benefit, Social Security automatically computes whether they would receive more under this benefit or the standard benefit and awards them the higher Figure 2. Percentage of All Households amount. Strikingly, the number of workers who Receiving Social Security Worker Benefits by receive the minimum benefit has been plummeting Poverty Status, 2017 (see Figure 1), and the Social Security actuaries proj- 20% ect that the program will have no new beneficiaries at all beginning this year.4 The main reason is simple – 15.6% the initial benefit level is indexed to prices while stan- 15% dard Social Security benefits are indexed to average wages. Since prices generally rise more slowly than wages, the minimum benefit level has been gradually 10% sinking below the standard benefit level for a growing 8.8% percentage of workers. This trend would not be a concern if low earners 5% received enough from the standard benefit to avoid poverty, but many do not. For example, the Social Security actuaries analyze benefits for hypothetical 0% individuals at different levels of lifetime earnings. A Poor Near poor “very low earner” retiring at age 65 in 2017 would Note: Near poor is defined as a household with less than 125 have an average Social Security benefit of just over percent of the poverty level. $9,000 per year, well below the Census Bureau’s Source: U.S. Census Bureau, Current Population Survey poverty threshold of $11,756 for a single person age (2018b). 65 or over.5 Not surprisingly, then, 8.8 percent of all Issue in Brief 3 Reforming the Minimum The other three program levers affect who is eli- gible to receive a full or partial benefit. Benefit • Years needed for full benefit. Requiring more Proposals to improve the minimum benefit tend to years for a full benefit would mean fewer people be a staple element of Social Security reform pack- qualify. By itself, it would also reduce benefit ages from bipartisan commissions, policy analysts, amounts as recipients would get a smaller benefit and legislators. The main objectives are to provide a for any given number of years of work below the larger, more stable, benefit level and to target specific new threshold. At the same time, such a change types of low earners. To achieve these objectives, could boost work incentives. reformers use one or more levers that affect the mini- mum benefit’s design (see Table 1). • Years needed for any benefit. Requiring more years for a partial benefit would make it harder for those with shorter careers to qualify, but could Table 1. Minimum Benefit Design and Effects of also enhance work incentives. Potential Changes • Earnings threshold. Reducing the threshold need- Current Most likely Effect of ed to earn each year of eligibility would make it Program levers policy change change easier to qualify for a benefit. This change could To raise benefits reduce work incentives. Full benefit Raise Higher $10,470 amount amount benefits now Indexation of Index to Index to Higher Specific Reform Proposals benefits prices wages benefits later Policy experts from across the political spectrum have To change eligibility introduced proposals to reform the minimum benefit Years for full Increase Fewer get over the past two decades. This activity reflects wide- 30 years benefit years full benefit spread agreement that, due to the functional demise Years for any Increase Fewer get of the current minimum benefit, a new benefit is 11 years benefit years partial benefit necessary to help protect long-career workers with low Earnings Reduce More qualify earnings from poverty. $14,805 threshold threshold for a benefit This analysis looks at five proposals, which cover a range of options. The sponsors and years introduced Sources: U.S. Social Security Administration (2018a); and are: Sen. Bernie Sanders and Rep. Peter DeFazio authors’ analysis. (2017);8 Rep. Sam Johnson (2016); the Commission on Retirement Security and Personal Savings con- The first two program levers in Table 1 affect the vened by the Bipartisan Policy Center (BPC) (2016); amount of the minimum benefit. Rep. Paul Ryan (2010); and the National Academy of Social Insurance (NASI) (2009).9 • Full benefit amount. Raising the initial full benefit amount increases benefits across the board, as Raising Benefits those with a partial benefit would get a corre- sponding boost. Four of the five proposals would substantially raise the full benefit, with three of them (Sanders/DeFazio, • Indexation of benefits. Changing the indexation NASI, and Ryan) increasing it to 120-125 percent of the initial benefit from price growth to wage of the poverty level for an individual, and Johnson growth would make the benefit more generous increasing it to a higher level.10 The BPC proposal over time relative to the poverty level. takes a different design approach; its benefit would be an add-on supplement to the standard Social Security benefit – phased out as the standard benefit rises. 4 Center for Retirement Research All proposals, except for Ryan’s, would index ini- Figure 3. Cost of Minimum Benefit Proposals as a tial benefits to average wages, which would correct the Percentage of Taxable Payroll, Over 75 Years design limitation that has led the current minimum benefit to become nearly obsolete. 0.3% 0.25% 0.23% Changing Eligibility 0.20% 0.2% 0.17% The Johnson proposal would increase the number of years needed for a full benefit from 30 to 35. By setting a higher bar for receiving a full benefit, this 0.1% specific provision would offset a modest portion of the Johnson proposal’s increase in the full benefit 0.01% amount. 0.0% The Ryan plan would narrow eligibility by limiting Ryan Sanders/ BPC Johnson NASI its benefit increase to those with more than 20 years (2010) DeFazio (2016) (2016) (2009) of earnings. This provision would effectively mean (2017) that – going forward – workers with 20 or fewer years Note: Estimates reflect assumptions from the 2018 Social of earnings would no longer be eligible for any mini- Security Trustees Report, which may differ from estimates mum benefit as the current program (which allows when the proposals were initially introduced. eligibility starting at 10 years) has nearly disappeared Source: U.S. Social Security Administration (2018b). already.11 Both the Sanders/DeFazio and NASI plans would expand eligibility by reducing the threshold needed Assessments of Reform for a year of earnings credit from $14,805 to the $5,440 amount used for the standard Social Security Several studies have assessed how reforming the formula. The BPC plan similarly expands eligibility minimum benefit would affect the number of eligible by automatically making its minimum benefit avail- individuals and reduce poverty. Many of these studies able to low earners who qualify for the standard Social were conducted a decade or more ago, but – given the Security benefit. The Johnson plan would move in general consistency in reform proposals over time the same direction, but less dramatically, by adopting – their findings still broadly apply. The consensus an earnings threshold for the minimum benefit of is that raising the minimum benefit amount and/ $10,875 in 2018.12 or indexing it to wages would substantially expand the number of recipients and reduce poverty rates.13 Effect on Costs And switching the earnings threshold to the lower level used for standard Social Security benefits would Despite differences in the details, the costs for the significantly increase the number of individuals eli- proposals are broadly similar, ranging from 0.17 gible for a full or partial minimum benefit.14 Studies percent to 0.25 percent of taxable payroll over Social have also found that reforming the minimum benefit Security’s 75-year horizon (see Figure 3). The excep- would be a more effective anti-poverty tool than the tion is the narrowly structured Ryan plan, which has current spousal benefit or a reformed widow benefit, virtually no cost because eligibility is limited and the partly because the growing number of low-income benefit level is not indexed to wages. The NASI and workers who spend most of their adult lives single are Sanders/DeFazio plans are nearly identical except not eligible for family benefits.15 that the NASI plan includes a caregiver credit, which adds to its cost. The Johnson proposal, with the high- est minimum benefit level, also has the highest cost among the four proposals that do not have a caregiver credit. Issue in Brief 5 Targeting, Administration, The final question is how to pay for a new mini- mum benefit. Using the Sanders/DeFazio proposal and Offsets as an example, its cost could largely be covered by making the spousal benefit more progressive. Specif- Targeting concerns have been raised about the mini- ically, this offset proposal would limit the spousal ben- mum benefit dating back to the program’s original efit to the amount received by the spouse of a worker 1939 structure, which was thought to provide “wind- at the 75th percentile of earners. An additional offset fall” benefits to those with very little attachment to that would cover the remaining costs could come Social Security.16 The main issue today seems to be from reducing benefits for higher earners by lowering not whether a new minimum benefit can be well the 15-percent factor applied to earnings over $5,583 targeted to its intended recipients, but how broadly per month to 5 percent. (This offset provides enough to define the intended recipients. Should benefits be savings to also cover the costs of a caregiver credit, as more concentrated on those who work full time for noted in a previous brief in this series.)17 many years or should a significant minimum benefit also be accessible to those with lower earnings and shorter labor force histories? Conclusion Administrative complexity is not likely to be a significant concern as most of the proposals have a A broad consensus exists for reforming Social Secu- structure similar to the current minimum benefit. rity’s minimum benefit. Reformers have suggested The Social Security Administration would not need various ways to ensure that a new minimum benefit to collect new data on beneficiaries and it already has would keep at least full-time, full-career workers a system for determining whether individuals are above the traditional poverty level. The main differ- eligible. The BPC plan has a different design, which ence in the proposals revolves around who should might require a more involved communications be eligible for a minimum benefit. The narrower outreach effort to explain the new benefit, but it too reforms tilt more toward workers with longer careers should not require any new data collection and could and relatively higher earnings while broader reforms actually simplify the administrative process for deter- would make it easier for those with shorter careers mining eligibility by eliminating the current “years and lower earnings to qualify. In any case, reforming worked” requirement. the minimum benefit would clearly succeed in reduc- ing poverty risk for some older Americans. 6 Center for Retirement Research Endnotes 1 Social Security’s original minimum benefit was 10 The Johnson plan would tie the minimum benefit established in 1939, and a new version of the benefit level to the Social Security Administration’s Average was introduced in 1972. Wage Index (AWI), with a full minimum benefit equal to 35 percent of the AWI in 2017 (or about $17,600). 2 To earn a year of wage credits under the standard benefit formula, a worker needs to make just $5,440 11 A new proposal from several poverty experts of- in 2019 (or $1,360 per quarter). The minimum ben- fers a very different approach to the number of years efit’s higher threshold for coverage credits may seem needed for eligibility; it would provide access to a full counterintuitive, but it reflects policymakers’ intent minimum benefit guarantee (equal to the poverty to direct this benefit toward regular, full-time workers level) to anyone with at least 10 years of covered earn- with low earnings rather than sporadic or part-time ings under Social Security. See Herd et al. (2018). workers; see Olsen and Hoffmeyer (2001/2002). 12 Some proposals would also expand eligibility for 3 Unlike the standard benefit, the minimum benefit specific groups. The Ryan and Johnson plans would amount is not increased for those who claim later ease requirements for the disabled, and the NASI than the FRA. plan would add caregiver credits. For a full discus- sion of caregiver credits, see the companion brief in 4 The number of beneficiaries actually receiving this series (Munnell and Eschtruth 2018). higher benefits due to this provision is even lower than shown in Figure 1, because some people who 13 See Favreault, Mermin, and Steuerle (2006) for qualify for a minimum benefit on their own earnings an in-depth analysis of minimum benefit effects. For record receive a higher spousal benefit under the more evidence of expanded eligibility, see Fitzpat- standard benefit calculation (see Li 2018). rick, Hill, and Muller (2003) and Sandell, Iams, and For the actuaries’ projections of the year in which Fanaras (1999). the minimum benefit will have no new beneficiaries, see Feinstein (2013). 14 Springstead, Whitman, and Shoffner (2014). 5 The Social Security benefit estimate is from Cling- 15 Regarding spousal benefits, see Herd (2005). Re- man, Burkhalter, and Chaplain (2018). The poverty garding widow benefits, see Favreault, Sammartino, threshold is from the U.S. Census Bureau (2018a). and Steuerle (2002), and Favreault and Sammartino (2002). Regarding SSI, see Davies and Favreault 6 Given concerns about the official poverty measure, (2004). the Census Bureau introduced a Supplemental Pov- erty Measure (SPM) in 2011; see Bridges and Ge- 16 The 1939 benefit design was criticized for poor sumaria (2016) for a thorough comparison. In 2017, targeting due to a very low bar for eligibility, allow- the SPM for households 65+ was 14.1 percent while ing many people with just a few years of coverage the official poverty rate was 9.2 percent (Fox 2018). under Social Security and many years in non-covered employment (such as public sector workers) to claim 7 Shelton (2014) provides a good example of how the the minimum benefit. In 1972, policymakers cre- minimum benefit is disappearing. ated a new minimum benefit with stricter eligibility criteria, which remains in place today. In 1981, the 8 A very similar minimum benefit provision was also 1939 provision was eliminated. For more details on included in separate 2017 bills by Rep. Al Lawson and the legislative history of the minimum benefit, see Li Rep. John Larson. (2018) and Olsen and Hoffmeyer (2001/2002). 9 Many others proposed reforms to the minimum 17 Any interaction effects among the various benefit benefit in the 1990s and early 2000s – e.g., Diamond provisions are not included in these cost estimates. and Orszag (2004) – that are broadly similar in struc- The caregiver credit brief is Munnell and Eschtruth ture to some of the recent proposals. (2018). Issue in Brief 7 References Commission on Retirement Security and Personal Fitzpatrick, Christina Smith, Catherine Hill, and Savings. 2016. “Securing Our Financial Future.” Leslie Muller. 2003. “Increasing Social Security Washington, DC: Bipartisan Policy Center. Benefits for Women and Men with Long Careers and Low Earnings.” Paper prepared for Institute Clingman, Michael, Kyle Burkhalter, and Chris Chap- for Women’s Policy Research Conference (June lain. 2018. “Replacement Rates for Hypothetical 24). Washington, DC. Retired Workers.” Actuarial Note 2018.9. Balti- more, MD: U.S. Social Security Administration, Fox, Liana. 2018. The Supplemental Poverty Measure: Office of the Chief Actuary. 2017. Current Population Report P60-265. (Sep- tember). Washington, DC: U.S. Census Bureau. Bridges, Benjamin and Robert V. Gesumaria. 2016. “Poverty Status of Social Security Beneficiaries, Herd, Pamela, Melissa M. Favreault, Madonna Har- by Type of Benefit.” Social Security Bulletin 76(4): rington Meyer, and Timothy M. Smeeding. 2018. 19-50. “A Targeted Minimum Benefit Plan: A New Pro- posal to Reduce Poverty Among Older Social Secu- Diamond, Peter A. and Peter R. Orszag. 2004. Saving rity Recipients.” RSF: The Russell Sage Foundation Social Security: A Balanced Approach. Washington, Journal of the Social Sciences 4(2): 74-90. DC: Brookings Institution Press. Herd, Pamela. 2005. “Ensuring a Minimum: Social Davies, Paul S. and Melissa M. Favreault. 2004. Security Reform and Women.” The Gerontologist “Interactions between Social Security Reform and 45(1): 12-25. the Supplemental Security Income Program for the Aged.” Working Paper 2004-02. Chestnut Hill, Johnson, Sam. 2016. Social Security Reform Act of MA: Center for Retirement Research at Boston 2016. H.R. 6489. Washington, DC: U.S. House of College. Representatives. Favreault, Melissa M., Gordon Mermin, and C. Eu- Larson, John. 2017. Social Security 2100 Act. H.R. gene Steuerle. 2006. “Minimum Benefits in Social 1902. Washington, DC: U.S. House of Representa- Security.” Report #2006-17. Washington, DC: tives. AARP. Lawson, Rep. Al. 2017. Social Security for Future Gen- Favreault, Melissa M., Frank J. Sammartino, and C. erations Act of 2017. H.R. 2855. Washington, DC: Eugene Steuerle. 2002. “Introduction” and “Social U.S. House of Representatives. Security Benefits for Spouses and Survivors: Options for Change.” In Social Security and the Li, Zhe. 2018. “Social Security: Minimum Benefits.” Family: Addressing Unmet Needs in an Underfunded CRS Report R43615. Washington, DC: Congres- System. Washington, DC: Urban Institute Press. sional Research Service. Favreault, Melissa M. and Frank J. Sammartino. 2002. Munnell, Alicia H. and Andrew D. Eschtruth. 2018. “Impact of Social Security Reform on Low-Income “Modernizing Social Security: Caregiver Credits.” and Older Women.” Report , 2002-11. 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Social Security Statistical Supplement. Washington, DC. RETIREMENT RESEARCH About the Center Affiliated Institutions The mission of the Center for Retirement Research The Brookings Institution at Boston College is to produce first-class research Mathematica – Center for Studying Disability Policy and educational tools and forge a strong link between Syracuse University the academic community and decision-makers in the Urban Institute public and private sectors around an issue of criti- cal importance to the nation’s future. To achieve this mission, the Center sponsors a wide variety of Contact Information Center for Retirement Research research projects, transmits new findings to a broad Boston College audience, trains new scholars, and broadens access to Hovey House valuable data sources. Since its inception in 1998, the 140 Commonwealth Avenue Center has established a reputation as an authorita- Chestnut Hill, MA 02467-3808 tive source of information on all major aspects of the Phone: (617) 552-1762 retirement income debate. Fax: (617) 552-0191 E-mail: crr@bc.edu Website: http://crr.bc.edu © 2019, by Trustees of Boston College, Center for Retirement Research. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that the authors are identified and full credit, including copyright notice, is given to Trustees of Boston College, Center for Retirement Research. The research reported herein was supported by AARP. The findings and conclusions expressed are solely those of the authors and do not represent the opinions or policy of AARP or the Center for Retirement Research at Boston College.