Maximizing Social Security: Ensuring Adequate Policy for Workers

1. Social Security Innovations Challenge: Ensuring Adequate Policy for Workers Social Security and Social Insurance Monique Morrissey Economic Policy Institute March 5, 2019 National Academy of Social Insurance & AARP

2. What is the function of social insurance? • Insurance? • Poverty alleviation? • Income redistribution? • Macroeconomic stabilization?

3. Answer: E. All of the above! (but always includes insurance component) • Social insurance can be useful even in absence of poverty, inequality, economic instability • Social Security is the quintessential social insurance program: • Insures workers, families against death, disability, and outliving savings • Single most important anti-poverty program—not just for seniors • Replaces a higher share of pre-retirement income for low earners • Automatic stabilizer • Enables older workers who lose jobs during recessions to retire; countercyclical effect boosts consumption & lowers unemployment (401ks have opposite effect).

4. Advantages of a universal system • Maximizes risk pooling • No adverse selection • Economies of scale • Costs spread over lifecycle • Intergenerational social compact

5. Social insurance often intergenerational • Social Security essentially a pay-as-you-go system. • Current workers fund current beneficiaries • First beneficiaries contributed little • Seniors devastated by Great Depression • Trust fund usually small—built up to fund Boomer retirement. • Internal rate of return ≈ economic growth rate • Similar to long-run financial ROR with less volatility

6. Government as insurer of last resort • Family members can die • Insurance companies can go bankrupt • Government endures

7. Private insurance often inefficient, insecure, inadequate • Needs to be regulated • Incentive to deny claims, cherry-pick participants • Investors protected from downside risk • Often—not always—more expensive • Adverse selection • Profit margins • Comparison shopping difficult; trust & complexity issues • Marketing, billing, underwriting costs • But, in some cases, private-sector may do a better job restraining costs • Examples: Medicare Advantage plans game the system & take advantage of taxpayer subsidies. Individual annuities, disability & long-term care insurance are expensive, rarely bought.

8. What risks can social insurance protect against? • Lost earnings due to… • Work injury or illness • Unemployment • Disability • Old age • Death (survivor benefits) • Medical, long-term care& other catastrophic expenses • Loss of pension benefits due to employer bankruptcy

9. Social Insurance ≠ Public Assistance An ideal social insurance program is… • Universal • Contributory • Defined by statute • Not means-tested Few programs perfectly fit this mold.

10. Is Medicare (1965) social insurance? Yes, even though Medicare… • is partly voluntary (except Part A) • is partly funded out of general revenues • is partly privatized (Part C) • doesn’t protect against catastrophic expenses

11. Social insurance is enduring • Intergenerational social contract • Dedicated funding • Earned benefits • Allows future planning (retirement benefits)

12. Popular among voters of all political stripes • Failed Social Security privatization designed to grow GOP investor base. • Most effective attacks focused on sustainability • Young people still supportive, but worried. • Some conservatives call for a more “progressive” program, but progressives resist.

13. Means-tested programs • Stigmatized • Complex • Costly to administer • Applicants deterred by need for documentation, time-consuming process. “Programs for the poor become poor programs”

14. Social Insurance Programs • Social Security • Workers’ Compensation • Unemployment Insurance • Medicare • Pension Benefit Guaranty Corporation

15. Public Assistance Programs(a.k.a. safety net, means-tested, welfare) • Income: SSI, EITC • Health: Medicaid, CHIP • Food: SNAP, WIC, School Lunch/Breakfast • Energy: LIHEAP

16. Should long-term care be a means-tested benefit? • Medicaid does a reasonable job covering working-age families • ACA expansion. • Helps low-income (“dual eligible”) seniors afford medical expenses. • Pays for long-term care, but only after drawdown

17. Social Security ≠ SSI • Both provide income to seniors and disabled, among other beneficiaries • Both administered by Social Security Administration • One is social insurance, the other is a safety-net program

18. Social Security (1935) • Almost all workers are covered • Mostly financed by employer and employee contributions • Benefits based on career earnings • No income, resource limits • Minimum work credits required • Provides benefits to eligible family members • Other income generally doesn’t affect benefits, though… • earnings may affect disability & early retirement benefits • some higher-income retirees pay taxes on benefits • Where you live, who you live with doesn’t affect benefit

19. SSI (1972) • Benefits based on need • Financed by general revenues • Beneficiaries must have limited income, resources • No work credits required • No family benefits • Benefit based on federal and state laws • Other income may affect benefits • Where you live, who lives with you may affect benefits Source: SSA, Social Security and SSI: What’s the difference?” 2009

20. Precursors Local/State • Poor relief • Mothers’ pensions • Teacher, firefighter, police pensions • Aid to the blind • State workers’ compensation laws Federal • Veterans benefits • Widows benefits, land grants • Civil service retirement Federal role expanded in Great Depression. Some programs, like workers compensation, governed by both federal and state laws.

21. FDR’s Expansive Vision • Envisioned broad social insurance, not just retirement • German model (Bismarck) • Contributory program that protected workers and their families • In contrast, Canada & other countries have an old-age tier for all seniors (not means-tested like SSI) • Health, unemployment, disability & other benefits planned • Health insurance took longest—pushback from medical profession

22. Why don’t people just save? • Precautionary saving can’t cover catastrophic expenses • Retirement seems more predictable, since most workers will retire • However, longevity and investment risks remain • Need to contribute twice as much to a 401(k) to provide similar retirement security.

23. Is social insurance always the answer? • Can encourage risky behavior (“moral hazard”) • e.g. disaster assistance, flood insurance • Can be costly to administer,guard against fraud • Should have social (not just private) benefit • Can discourage work • Netherlands disability insurance

24. Alternatives • Mandatory private insurance • Car owners’ liability insurance • Affordable Care Act insurance mandate • Taxpayer-subsidized saving • 401(k)s, HSAs, etc. • Saving may be voluntary,but taxes aren’t! • Safety net programs

25. Expansion and Retrenchment 1935: Signed into law 1937: First taxes collected (1%+1% to $3,000) 1939: Benefits for survivors and dependents 1956: Early retirement benefits for women (62) 1956: Disability benefits for workers aged 50-64 1961: Early retirement benefits for men (62) 1965: Payments to divorced wives 1972: Automatic COLA 1977: Payments to divorced husbands 1983: Gradual increase in retirement age to 67 Taxation of benefits (gradually hits middle-class) 2000: Elimination of earnings test above NRA