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Social Security

Social Security

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Social Security

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  1. Social Security Current Reform Proposals: How They Would Affect People With Disabilities Consortium for Citizens with Disabilities June 1, 2011

  2. Social Security Background on the Social Security Programs Consortium for Citizens with Disabilities June 2011 2

  3. Social Security • 54.2 million people receive Social Security benefits from the retirement, disability, and survivors programs • More than one-third of all monthly checks go to non-retired individuals Consortium for Citizens with Disabilities

  4. Social Security Insurance Retirement – insures against poverty after worker retires Includes retirees with disabilities Spouses, including those with disabilities Disabled Adult Children Example of people with increased reliance on Social Security benefits Parents of children with disabilities with reduced earnings and savings due to care giving June 2011 Consortium for Citizens with Disabilities 4

  5. Social Security Insurance (continued) Survivors – provides benefits to dependents after an insured individual (worker, disability insurance or retirement insurance beneficiary) dies Minor children and spouses of deceased workers and retirees Disabled widow(ers) Disabled adult children 5 June 2011 Consortium for Citizens with Disabilities

  6. Social Security Insurance (continued) Disability – insures against loss of ability to work due to disability Disabled workers, their spouses and children, including disabled adult children Essential protection Millions of families face disability Adults with serious disabilities have very low employment rate Poverty rates twice as high for workers with disabilities as other groups who receive Social Security Equals half or more of TOTAL family income for about half of disabled worker beneficiaries June 2011 6 Consortium for Citizens with Disabilities

  7. Current Design: The Positives Fixed monthly payment Ability to move among three programs: work history, age, & eligibility category Pay multiple family members based on one worker’s earnings Adjusted annually for inflation (generally) 7 June 2011 Consortium for Citizens with Disabilities

  8. Social Security Background on Financing and Long-Term Solvency June 2011 8 Consortium for Citizens with Disabilities

  9. Social Security & the Deficit June 2011 Consortium for Citizens with Disabilities 9 National groups examining ways to reduce deficit, including Social Security changes Social Security did NOT cause the deficit Cutting benefits will NOT solve budget crisis Cutting benefits will deepen financial crisis for many people with disabilities

  10. Social Security & the Deficit • Social Security did NOT cause the deficit: • It is self-funded • By law, it can only spend money dedicated to the program • No borrowing authority Consortium for Citizens with Disabilities

  11. Social Security’s Finances • It is NOT a crisis • Social Security does face a long-term financing shortfall • Only modest changes are needed to address shortfall Consortium for Citizens with Disabilities

  12. Current & Future Surplus • Surplus = invested assets or Trust Fund reserves • $2.6 trillion by end 2010 • Will continue to grow 2011-2022 • Projected to reach $3.7 trillion by 2022 Consortium for Citizens with Disabilities

  13. Projected Shortfall Over 75 Years • Less than 1 percent of Gross Domestic Product (GDP) • Another measure = 2.22 percent of taxable payroll • Previous Trustees’ forecasts = similar projection Consortium for Citizens with Disabilities

  14. Future Projections • Pay 100% of scheduled benefits • 2011 Trustees Report: until 2036 • Pay reduced benefits (if no action taken) • 2011 Trustees Report: 77% of scheduled benefits starting 2037 Consortium for Citizens with Disabilities

  15. Social Security Background: How Social Security Benefits Are Calculated June 2011 Consortium for Citizens with Disabilities 15

  16. How Social Security Benefits Are Calculated 16 Consortium for Citizens with Disabilities June 2011 Benefit calculations under all programs (retirement, disability, survivors) use the same benefit formula Benefit formula is used to calculate Primary Insurance Amount or PIA

  17. How Social Security Benefits Are Calculated (continued) 17 Consortium for Citizens with Disabilities June 2011 Calculated based on the earnings of the worker Worker must have enough credits, or “quarters of coverage,” to be eligible Must have paid in 40 quarters or 10 years to be fully insured

  18. How Social Security Benefits Are Calculated (continued) 18 Consortium for Citizens with Disabilities June 2011 Younger workers qualify under the disability or survivor programs with fewer credits Exact number of quarters required is dependent on the age of the worker at the time of disability or death

  19. How Social Security Benefits Are Calculated (continued) 19 Consortium for Citizens with Disabilities June 2011 • Social Security benefit amount is based on the worker’s average earnings over their years of work • Retirement Benefit: Based on 35 years • “Zero years” included if less than 35 years • Lowest years “dropped” out (if more than 35)

  20. How Social Security Benefits Are Calculated (continued) 20 Consortium for Citizens with Disabilities June 2011 • Disability and survivors benefits: Number of years based on age of worker at onset of disability or death • Use “elapsed” years • The number of full calendar years since the person turned 21 • If age 47 or over – get 5 “dropped” years • Under age 47 – get 4 or less “dropped” years

  21. How Social Security Benefits Are Calculated (continued) 21 Consortium for Citizens with Disabilities June 2011 • Once earnings determined, SSA “indexes” the person’s earnings • Done to update earnings to current levels • Reflects earnings increases in average wage levels for each year • Calculation results in Average Indexed Monthly Earnings or AIME

  22. How Social Security Benefits Are Calculated (continued) 22 June 2011 Consortium for Citizens with Disabilities • Plug AIME into benefit formula • Formula Replaces Percentage of AIME – Current Formula (2011) • 0-$749 = Replace 90% • $749-$4517 = Replace 32% • $4517 and up to taxable max = Replace 15% • Dollar amounts at which replacement percentage changes ($749, $4517) are known as “bend points”

  23. How Social Security Benefits Are Calculated (continued) 23 June 2011 Consortium for Citizens with Disabilities • Bend points change every year • Replacement percentages in formula set by statute and do not change unless Congress changes them

  24. How Social Security Benefits Are Calculated (continued) June 2011 24 Consortium for Citizens with Disabilities This calculation determines Primary Insurance Amount (PIA): • Retirement Program • Get full PIA as monthly benefit if retire at your Full Retirement Age (FRA) – also sometimes referred to as Normal Retirement Age (NRA) • Benefit is reduced if retire before then – amount of reduction based on how long before reach full retirement age begin to collect benefits • Youngest age at which benefits can be collected is known as Early Retirement Age or ERA

  25. How Social Security Benefits Are Calculated (continued) 25 June 2011 Consortium for Citizens with Disabilities • Disability and survivors benefits are calculated as if someone retires at FRA • Based on the full PIA • Not reduced regardless of age at which disability onset or death occurs • PIA is also plugged into another formula to determine “family maximum” to determine benefits of family members

  26. Benefits Are Modest Under Current Formula June 2011 Consortium for Citizens with Disabilities 26

  27. Benefits Are Large Percent of Income for Lower Income Retirees June 2011 27 Consortium for Citizens with Disabilities

  28. Proposals and Options for Achieving Long-Term Solvency of the Social Security Programs Consortium for Citizens with Disabilities

  29. Possible Options: Solvency Two approaches, but could combine options from each: Cut benefits Increase revenue June 2011 Consortium for Citizens with Disabilities 29

  30. What Is Needed to Achieve Long-Term Solvency • Often looked at as a percentage of payroll • As stated earlier: Need revenue increases or benefit cuts = to 2.22% of taxable payroll to make up shortage • Will explain how much of the shortfall each option will solve (as available) Consortium for Citizens with Disabilities

  31. Major Reform Proposals to Date June 2011 Consortium for Citizens with Disabilities 31 • National Commission on Fiscal Responsibility and Reform – known as Bowles/Simpson • Recommendations of Co-Chairs only • Commission Member Representative Jan Schakowsky (D-IL) also made recommendations • Bipartisan Policy Center Debt Reduction Taskforce – known as Rivlin/Domenici

  32. 32 June 2011 Consortium for Citizens with Disabilities Specific Proposals: Benefit Cuts

  33. Proposal 1: Change the Benefit Formula 33 June 2011 Consortium for Citizens with Disabilities • Achieve program savings by changing the replacement percentages in the benefit formula • Can be done: • Progressively: Change the replacement percentages for top earners only (i.e., decrease the percentage) • Regressively: Change the replacement percentages for all earners

  34. Proposal Specifics: Bowles/Simpson Consortium for Citizens with Disabilities 34 June 2011 • Bowles/Simpson (new formula) • $0-$9,000 = 90% replacement • $9,000 - $38,000 = 30% • $38,000 - $64,000 = 10% • $64,000 - max = 5% • Based on annual earnings rather than AIME • Results in benefit cuts for everyone with average annual earnings over $9,000 • Restores 0.86% of taxable payroll or 39% of shortfall

  35. Proposal Specifics: Rivlin/Domenici 35 June 2011 Consortium for Citizens with Disabilities • Rivlin/Domenici (new formula) • $0-$749 = 90% replacement • $749 - $4,517 = 32% • $4,517 - max = 10% • Results in benefit cuts only for those beneficiaries with average monthly earnings over $4,517 ($54,204/year) • Restores 0.07% of payroll or 3.2% of shortfall

  36. Impact on People with Disabilities 36 June 2011 Consortium for Citizens with Disabilities Any change to the benefit formula that decreases the replacement percentages will result in benefit cuts to people with disabilities in all benefit programs – retirement, disability, survivors

  37. Other Possible Formula Changes Resulting in Benefit Cuts 37 June 2011 Consortium for Citizens with Disabilities Increase the number of years used in calculating the AIME Change from wage indexing to price indexing when calculating the AIME Not included in proposals discussed today

  38. Proposal 2: Change the Retirement Age 38 June 2011 Consortium for Citizens with Disabilities • Current FRA (full retirement age) – • 66 for current retirees – up from 65 • Under current law, gradually being raised to 67 for all people born after 1960 • Current ERA (early retirement age) • 62 for all retirees • Not set to increase under current law

  39. Proposal Specifics 39 June 2011 Consortium for Citizens with Disabilities • Bowles/Simpson • Raise NRA to 68 by 2050 and 69 by 2075 • Raise ERA to 63 by 2075 • Restores 0.34% of taxable payroll or 15.3% of shortfall • Rivlin/Domenici • Does not include an increase in the retirement age per se • Indexes new benefits for longevity instead • Replacement rate will be 99.7% of benefits the year before • Restores 0.48% of taxable payroll or 21.6% of shortfall

  40. Raising the Retirement Age Is a Benefit Cut 40 June 2011 Consortium for Citizens with Disabilities

  41. Impact on People with Disabilities 41 June 2011 Consortium for Citizens with Disabilities Benefit cut for workers with disabilities who work until they reach retirement age or who retire early Benefit cut for people receiving family benefits from a retired worker

  42. Impact on People with Disabilities (continued) 42 June 2011 Consortium for Citizens with Disabilities • No direct effect on people receiving benefits under disability program but: • Disability applications already increasing due to current law increase in retirement age • Raising the ERA: • Leaves people with disabilities in their early 60s, but who do not meet the stringent requirements for Disability Insurance (DI) program, without Social Security insurance coverage • Will cause more workers to apply for DI benefits • Will increase the administrative workload, processing time for disability applications, and delay in benefit awards

  43. Proposal 3: Change the Cost of Living Adjustment Formula 43 June 2011 Consortium for Citizens with Disabilities • Current law provides for an annual Cost of Living Adjustment or COLA for benefits under all programs • Helps protect the value of benefits against inflation • Current COLA is based on the change in the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Worker) • There was no COLA for 2010 or 2011

  44. Proposal 3: Cost of Living Adjustment Formula (cont) 44 June 2011 Consortium for Citizens with Disabilities • Reform proponents argue that the current measure overstates inflation • Propose to change to another measure known as the “chained CPI” • Generally finds a smaller increase in the cost of living year to year • Bases its rate on “substitution effect” • When prices on a particular item go up, people will substitute other less expensive items in their place (e.g. if steak prices rise, a person will buy hamburger instead)

  45. Proposal Specifics 45 June 2011 Consortium for Citizens with Disabilities • Bowles/Simpson • Change to “Chained CPI” • Restores 0.50% taxable payroll or 22% of shortfall • Rivlin/Domenici • Change to “Chained CPI” • Restores 0.49% taxable payroll or 22% of shortfall

  46. Why the Chained CPI Is Not More Accurate 46 June 2011 Consortium for Citizens with Disabilities • More applicable to higher income earners • Can’t substitute hamburger for steak if already only eating hamburger or no meat • Not applicable to many seniors or people with disabilities • Majority of expenses are to meet basic needs • Underestimates expenses like medical care on which people with disabilities and seniors spend a larger percentage of their income

  47. Impact on People with Disabilities 47 June 2011 • Change in COLA will result in a benefit cut for all people receiving benefits under all Social Security programs • Effect is cumulative • The longer a person receives benefits the greater the benefit cut will be • People receiving disability benefits tend to receive benefits longer than people who receive benefits under other programs • Value of benefits no longer adequately protected from inflation Consortium for Citizens with Disabilities

  48. Proposals to Address Long-Term Solvency: Revenue Enhancements Consortium for Citizens with Disabilities

  49. Current Revenue Design • Almost every worker pays in – some state and local workers do not • Current FICA Tax Rate: 12.4% of earnings • 6.2% paid by employee • 6.2% paid by employer • Earnings taxed are capped at $106,800 – adjusted annually • Only earnings in the form of wages are taxed – dividends and capital gains are not Consortium for Citizens with Disabilities

  50. Interest Revenue • Two sources of revenue to the Social Security Trust Funds: • FICA Taxes • Interest earned on money in Trust Funds • Trust Funds invested in U.S. Treasury bonds • Steady return with no risk Consortium for Citizens with Disabilities