Evaluating the initial impact of eliminating the retirement earnings test

Under the retirement earnings test, Social Security benefits are reduced if earnings exceed specified amounts, although the benefit reduction is partly offset by future benefit increases. By imposing a tax on the earnings of beneficiaries, the earnings test provided a disincentive for them to supplement retirement income by working. The Senior Citizens Freedom to Work Act of 2000 eliminated the earnings test for Social Security beneficiaries who have reached the full retirement age. This article presents the first study of labor force activity (earnings and employment) among individuals aged 65-69 before and immediately after this sudden rule change. Drawing on Social Security administrative data, the author examines three widely expected reactions: increased return to work, increased hours worked, and accelerated applications for old-age benefits. The analysis finds that removing the retirement earnings test: Encouraged some workers to increase their earnings. The increases in earnings are large and significant among higher earners but are not statistically significant among lower earners. Had little effect on employment. Removing the earnings test appears to have had no immediate, significant effect on the employment rate of older workers. Employment of older people may be affected in the longer run, however. Slightly increased the pace of applications for benefits. Applications rose about 2 percent in the 65-69 age group in 2000. The overall acceleration will probably be small, however, because most individuals in this age group apply for benefits before reaching the full retirement age. Although the current analysis captures the effects of retaining older workers in the labor force, these initial results may not capture all the effects of eliminating the retirement earnings test, however, for two reasons. First, the analysis covers only a single year--the year the earnings test was eliminated. Since eliminating the earnings test may have had little effect on people who had already retired, its full effect may not be apparent for several years. Second, the analysis applies only to workers aged 65-69. Eliminating the earnings test for people above the full retirement age may also encourage younger workers to delay retirement and therefore increase their labor supply. Further analysis will therefore be required to determine the longer-run impact of eliminating the retirement earnings test.     

How have people responded to changes in the retirement earnings test in 2000?

This article describes responses to removing the retirement earnings test in 2000 for persons at the full retirement age or older. We examine annual earnings and retirement benefit claims from Social Security administrative data that cover the 4 years before and after the change. Three findings emerge from the study. First, the effect on earnings of removing the earnings test is uneven across people with different earnings levels. We find little effect on earnings at lower levels, but the effect on earnings in the mid to upper levels (50th to 80th percentiles) is large and significant. Such a finding indicates that the removal most affects people with earnings levels above the earnings test threshold. The largest increases in earnings are found at the 70th percentile for persons who have attained ages 65-69 and at the 60th percentile for those turning 65. Second, there is no clear evidence of the effect of the test's removal on the overall rate of labor force participation. A small rise in work participation among individuals aged 65-69 may be at least partially attributable to the trend already under way. Increases in work participation that do occur are mostly attributable to retaining older workers rather than inducing older workers back into the workforce. The effect appears to increase over time, suggesting that the removal has long-lasting effects on work participation. Third, the removal of the earnings test accelerated applications for benefits by 2 to 5 percentage points among individuals aged 65-69 and by 3 to 7 percentage points among those reaching age 65.     

Projecting retirement income of future retirees with panel data: results from the modeling income in the near-term (MINT) project

Cross-sectional data capture only a point in time and miss individual changes in earnings, labor force participation, marriage, fertility, and health. Because panel data follow individuals over time, they do not have this problem. The problems or concerns with cross-sectional data may be compounded when these data are used to make projections. Iams and Sandell (1997) found that using panel data on earnings explained much more variation in future earnings than using cross-sectional survey data. Panel data are also needed to estimate Social Security benefits, especially for women. Because of auxiliary benefits paid to spouses, ex-spouses, and widow(er)s of entitled workers, an individual's Social Security retirement benefit depends not only on his or her earnings history, but also on his or her marital history and the earnings histories of current and previous spouses. When we compare projected unreduced Social Security benefits with what they would be if we didn't have marital history or earnings history data for men, we find that: Benefits computed using only earnings histories are not very different from benefits computed using both earnings and marital histories. Benefits computed using only current earnings and marital histories underestimate benefits for those in earlier birth cohorts and overestimate benefits for those in the most recent birth cohort. Benefits computed without either marital or earnings histories underestimate benefits for all birth cohorts, but by much more for earlier cohorts than for more recent cohorts. For women we find that benefits computed without marital or earnings histories underestimate benefits in all birth cohorts. The largest differences are for women in earlier birth cohorts. Using both marital and earnings histories to estimate unreduced Social Security benefits, we find that men are projected to continue receiving higher benefits than women, although the gap is expected to narrow as the baby boomers near retirement age. We also look at the composition of projected total income available at retirement for those with incomes in the 45th-55th percentiles of the income distribution and find that: Total income at retirement is projected to be larger for men than for women in every birth cohort. Women are projected to receive the largest share of their total income from Social Security benefits. Men are projected to receive the largest share of their total income from other income sources, although this share declines as the baby boomers near retirement age.     

The retirement prospects of divorced women

For decades, policymakers have discussed how to remedy the high poverty rates of older widows. Yet older divorced women are more likely to be poor than older widows, and historical divorce and remarriage trends suggest that in the future a larger share of retired women will be divorced. This article uses the Social Security Administration's Modeling Income in the Near Term (version 6) to project the retirement resources and wellbeing of divorced women. We find that Social Security benefits and retirement incomes are projected to increase for divorced women and that their poverty rates are projected to decline, due in large part to women's increasing lifetime earnings. However, not all divorced women will be equally well off economic well-being in retirement varies by Social Security benefit type.     

Using data for couples to project the distributional effects of changes in Social Security policy

Under Social Security program rules, the aged receive Social Security benefits either as retired workers, spouses, divorced spouses, or widow(er)s. Retired-worker benefits are paid to workers who have 40 quarters of coverage over their lives. Auxiliary benefits are paid to spouses, divorced spouses, and widow(er)s of retired workers. Spouse benefits are computed using the earnings history of the current spouse for individuals who are married when they apply for benefits. Divorced spouse and widow(er) benefits are computed using the earnings history of the ex-spouse or deceased spouse with the highest PIA. A large number of retired women are entitled to auxiliary benefits. Some women receive only auxiliary benefits, while the majority of women have their retired-worker benefit supplemented by auxiliary benefits. Because the level of Social Security benefits can reflect the relative lifetime earnings of both spouses, as a couple, using individual data to estimate Social Security benefits will tend to underestimate actual benefits, particularly for women. However, detailed data for couples are often difficult to obtain. There is currently no known single data source that includes both marital and earnings history information. As a result, many researchers resort to estimating Social Security benefits using individual data or aggregate data, such as the average earnings of men and women. The Social Security Administration's Office of Research, Evaluation, and Statistics, with substantial assistance from the Brookings Institution, the Urban Institute, and the RAND Corporation, is developing a model that overcomes this problem by using the marital and earnings histories of both marital partners to estimate Social Security benefits. The Modeling Income in the Near Term (MINT) model projects retirement income (Social Security benefits, pension income, asset income, and earnings of working beneficiaries) from 1997 through 2031 for current and future Social Security beneficiaries using a unique data source--the Survey of Income and Program Participation (SIPP)--matched to Social Security Administration records. Using MINT data, this article establishes the importance of using data for couples rather than individuals by examining the impact of changing Social Security benefits to reflect 40 years of lifetime earnings rather than the 35 years required under current law. We compare the effect of this policy change on married women by estimating their benefits with data for couples and with individual data. Results indicate that: Using individual data overestimates the projected reduction in retirement benefits brought about by the policy change and makes the effects on women look more severe than they actually are. Because older birth cohorts are more likely than younger cohorts to receive auxiliary benefits based on their husbands' average lifetime earnings, the bias created by using individual data is projected to be much larger for older cohorts than for younger cohorts. This article emphasizes the importance of using data for couples to estimate Social Security benefits, particularly for women. Although our focus is on married women, using data for couples is just as important for calculating the retirement benefits of divorced and widowed individuals. For individuals who are divorced or widowed at retirement, their Social Security benefits are based on their own earnings history, as well as the earnings histories of each of their previous spouses.     

Comparing replacement rates under private and federal retirement systems

One measure of the adequacy of retirement income is replacement rate - the percentage of pre-retirement salary that is available to a worker in retirement. This article compares salary replacement rates for private-sector employees of medium and large private establishments with those for federal employees under the Civil Service Retirement System and the Federal Employees Retirement System. Because there is no standard benefit formula to represent the variety of formulas available in the private sector, a composite defined benefit formula was developed using the characteristics of plans summarized in the Bureau of Labor Statistics Medium and Large Employer Plan Survey. The resulting "typical" private-sector defined benefit plan, with an accompanying defined contribution plan, was then compared with the two federal systems. The Civil Service Retirement System (CSRS) is a stand-alone defined benefit plan whose participants are not covered by Social Security. Until passage of the 1983 Amendments to Social Security Act, it was the only retirement plan for most federal civilian employees. Provisions of the 1983 Amendments were designed to restore long-term financial stability to the Social Security trust funds. One provision created the Federal Employees Retirement System (FERS), which covers federal employees hired after 1983. It was one of the provisions designed to restore long-term financial stability to the Social Security trust funds. FERS employees contribute to and are covered by Social Security. FERS, which is a defined benefit plan, also includes a basic benefit and a 401(k)-type plan known as the Thrift Savings Plan (TSP). To compare how retirees would fare under the three different retirement systems, benefits of employees retiring at age 65 with 35 years of service were calculated using hypothetical workers with steady earnings. Workers were classified according to a percentage of the average wage in the economy: low earners (45 percent), average earners (100 percent) high earners (160 percent), and maximum earners (earnings at the taxable maximum amount). Overall, this analysis found that: Excluding Social Security benefits and TSP and defined contribution annuities, CSRS retirees have a higher pre-retirement salary replacement rate than either FERS or private-sector retirees. Private-sector retirees, however, have higher replacement rate than their FERS counterparts. Including Social Security benefits but not TSP and defined contribution plan annuities, CSRS retirees who are maximum earners have a higher pre-retirement salary replacement rate (despite receiving no Social Security benefits) than FERS retirees with the same earnings. Private-sector retirees in all earnings categories have a higher replacement rate than federal retirees with the same earnings. Including Social Security and TSP and defined contribution plan annuities, private-sector retirees in all earnings categories have a higher replacement rate than federal retirees, but their rate is close to that of FERS retirees. The rate is higher for FERS retirees than for CSRS retirees in all earnings categories. This analysis shows that replacement creates could exceed 100 percent for FERS employees who contribute who contribute 6 percent of earnings to the TSP over full working career. Private-sector replacement rates were quite similar for those with both a defined benefit and a defined contribution pension plan. Social Security replacement rates make up the highest proportion of benefits for th private sector's lowest income quartile group. The replacement rate for 401(k) plans and the TSP account for a higher proportion of benefits than does Social Security for all other income groups, assuming the absence of a defined benefit plan.     

Lifetime earnings patterns, the distribution of future Social Security benefits, and the impact of pension reform

In order to assess the effect of Social Security reform on current and future workers, it is essential to accurately characterize the initial situations of representative workers affected by reform. For the purpose of analyzing typical reforms, the most important characteristic of a worker is the level and pattern of his or her preretirement earnings. Under the current system, pensions are determined largely by the level of the workers' earnings averaged over their work life. However, several reform proposals would create individual retirement accounts for which the pension would depend on the investment accumulation within the account. Thus, the pension would also depend on the timing of the contributions into the account and hence on the exact shape of the worker's lifetime earnings profile. Most analysis of the distributional impact of reform has focused, however, on calculating benefit changes among a handful of hypothetical workers whose relative earnings are constant over their work life. The earnings levels are not necessarily chosen to represent the situations of workers who have typical or truly representative earnings patterns. Consequently, the results of such analysis can be misleading, especially if reform involves introducing a fundamentally new kind of pension formula. This article presents two broad approaches to creating representative earnings profiles for policy evaluation. First, we use standard econometric methods to predict future earnings for a representative sample of workers drawn from the Survey of Income and Program Participation (SIPP). Our statistical estimates are based on a simple representation of typical career earnings paths and a fixed-effect statistical specification. Because our estimation file contains information on each worker's annual earnings from 1951 through 1996 as reported in the Social Security Administration's earnings files, we have a record (though an incomplete one) of the actual earnings that will be used to determine future benefit payments. Our estimates of the earnings function permit us to make highly differentiated predictions of future earnings for each member of our sample. By combining the historical information on individual earnings with our prediction of future earnings up through the normal retirement age, our first approach produces tens of thousands of predicted career earnings paths that can be used in microsimulation policy analysis. Our second approach to creating lifetime earnings profiles is similar in some ways to the traditional method. For example, it is based on the creation of only a handful of "stylized" career earnings patterns. An important difference with the traditional method, however, is that we define the career earnings patterns so that they are truly representative of patterns observed in the workforce. We use simple mathematical formulas to characterize each stylized earnings pattern, and we then produce estimates of the average path of annual earnings for workers whose career earning path falls within each of the stylized patterns we have defined. Finally, we calculate the percentage of workers in successive birth-year cohorts who have earnings profiles that match each of the stylized earnings patterns. Although this method may seem simple, it allows the analyst to create stylized earnings patterns that are widely varied but still representative of earnings patterns observed among sizable groups of U.S. workers. The effects of policy reforms can then be calculated for workers with each of the stylized earnings patterns. Our analysis of U.S. lifetime earnings patterns and of the impact of selected policy reforms produces a number of findings about past trends in earnings, typical earnings patterns in the population, and the potential impact of reform. The analysis focuses on men and women born between 1931 and 1960. Along with earlier analysts, we find that men earn substantially higher lifetime wages than women and typically attain their peak career earnings at a somewhat earlier age. However, the difference in career earnings patterns between men and women has narrowed dramatically over time. Workers with greater educational attainment earn substantially higher wages than those with less education, and they attain their peak career earnings later in life. For example, among men with the least education, peak earnings are often attained around or even before age 40, whereas many men with substantial postsecondary schooling do not reach their peak career earnings until after 50. Our tabulations of the lifetime earnings profiles of the oldest cohorts (born around 1930) and projections of the earnings of the youngest profiles (born around 1960) imply that the inequality of lifetime earnings has increased noticeably over time. Women in the top one-fifth of female earners and men in the top one-fifth of male earners are predicted to receive a growing multiple of the economy-wide average wage during their career. Women born between 1931 and 1935 who were in the top fifth of female earners had lifetime average earnings that were approximately equal to the average economy-wide wage. In contrast, women born after 1951 who were in the top fifth of earners are predicted to earn almost 50 percent more, that is, roughly 150 percent of the economy-wide average wage. Women with a lower rank in the female earnings distribution will also see gains in their lifetime average earnings, but their gains are predicted to be proportionately much smaller than those of women with a high rank in the distribution. Men with high earnings are also predicted to enjoy substantial gains in their relative lifetime earnings, while men with a lower rank in the earnings distribution will probably see a significant erosion in their typical wages relative to the economy-wide average wage. That is mainly the result of a sharp decline in the relative earnings of low-wage men born after 1950. In creating stylized earnings profiles that are representative of those of significant minorities of U.S. workers, we emphasized three critical elements of the earnings path: the average level of earnings over a worker's career, the upward or downward trend in earnings from the worker's 30s through his or her early 60s, and the "sagging" or "hump-shaped" profile of earnings over the worker's career. That classification scheme yields 27 characteristic patterns of lifetime earnings. Surprisingly, the differnce between men and women within each of those categories is quite modest. The main difference between men and women is in the proportions of workers who fall in each category. Only 14 percent of men born between 1931 and 1940 fall in earnings categories with the lowest one-third of lifetime earnings, whereas 53 percent of women born in those years have low-average-earnings profiles. On the other hand, women born in those years are more likely to have a rising trend in lifetime earnings, while men are more likely to have a declining trend. We find that the distribution of lifetime earnings contains relatively more workers with below-average earnings and relatively fewer with very high earnings than assumed in the Social Security Administration's traditional policy analysis. For example, the "low earner" traditionally assumed by the Office of the Chief Actuary is assigned a level of average lifetime earnings that we find to be higher than the average earnings of persons in the bottom one-third of the lifetime earnings distribution. The stylized earnings profiles developed here can be used for policy evaluation, and the results can be compared with those from the more traditional analysis. That comparison produces several notable findings. Because earnings profiles that are actually representative of the population tend to have lower average earnings than assumed in the traditional analysis, workers typically accumulate somewhat less Social Security wealth than implied in the traditional analysis. On the other hand, because the basic benefit formula is tilted in favor of lower-income workers, the internal rate of return on Social Security contributions is somewhat higher than detected in the traditional analysis. Moreover, the primary insurance amount measured as a percentage of the worker's average indexed earnings tends to be higher than implied by the traditional analysis. Finally, the stylized earnings patterns can be used to compare benefit levels enjoyed by workers under the traditional Social Security formula and under an alternative plan based on individual investment accounts. That comparison shows, as expected, that the traditional formula favors low-wage workers and one-earner couples, while an investment account favors single, high-wage workers. Comparing two workers with the same lifetime average earnings, the traditional formula favors workers with rising earnings profiles (that is, with lifetime earnings heavily concentrated at the end of their career), while investment account pensions favor workers with declining earnings profiles (that is, with earnings concentrated early in their career).     

Lifetime distributional effects of Social Security retirement benefits

This article presents three measures of the distribution of actual and projected net benefits (benefits minus payroll taxes) from Social Security's Old-Age and Survivors Insurance (OASI) for people born between 1931 and 1960. The results are based on simulations with the Social Security Administration's Model of Income in the Near Term (MINT), which projects retirement income through 2020. The base sample for MINT is the U.S. Census Bureau's Survey of Income and Program Participation panels for 1990 to 1993, matched with Social Security administrative records. The study population is grouped into 5-year birth cohorts and then ranked by economic status in three ways. First, the population is divided into five groups on the basis of individual lifetime covered earnings, and their lifetime present values of OASI benefits received and payroll taxes paid are calculated. By this measure, OASI provides much higher benefits to the lowest quintile of earners than to other groups, but it becomes less redistributive toward lower earners in more recent birth cohorts. Second, people are ranked by shared lifetime covered earnings, and the values of shared benefits received and payroll taxes paid are computed. Individuals are assumed to split covered earnings, benefits, and payroll taxes with their spouses in the years they are married. By the shared covered earnings measure, OASI is still much more favorable to persons in the lower income quintiles, although to a lesser degree than when people are ranked by individual covered earnings. OASI becomes more progressive among recent cohorts, even as net lifetime benefits decline for the entire population. Finally, individuals are ranked on the basis of their shared permanent income from age 62, when they become eligible for early retirement benefits, until death. Their annual Social Security benefits are compared with the benefits they would have received if they had saved their payroll taxes in individual accounts and used the proceeds to buy either of two annuities that provide level payments from age 62 until death: a unisex annuity that is based on the average life expectancy of the birth cohort or an age-adjusted annuity that is based on the worker's own life expectancy. On the permanent income measure, OASI is generally more favorable to people in higher income quintiles. Moreover, it is particularly unfavorable to those in the lowest quintile. Because people in the lowest quintile have a shorter life expectancy, they receive OASI benefits for a shorter period. This group would receive greater benefits in retirement if they invested their payroll taxes in the age-adjusted annuity. OASI is more favorable to them than the unisex annuity, however, OASI is becoming more progressive in that the net benefits it provides drop more rapidly among higher income quintiles than lower ones. This article also examines how OASI affects individuals by educational attainment, race, and sex. On both the lifetime covered earnings and the permanent income measures, OASI is more favorable to workers with less education and more favorable to women. The results by race and ethnicity are mixed. When people are ranked by the present value of their shared lifetime covered earnings, OASI appears more favorable to non-Hispanic blacks and Hispanics than to non-Hispanic whites. When people are ranked by shared permanent income in retirement, however, OASI produces negative returns for both non-Hispanic blacks and non-Hispanic whites in the most recent birth cohorts, with non-Hispanic blacks faring relatively worse. The changes across cohorts occur partly because of changes in tax rates and benefits, but more importantly because of changing demographics and earnings patterns of the workforce. Of particular importance is the increasing share of beneficiaries who receive worker benefits instead of auxiliary benefits as wives or widows. OASI benefits are based on the lifetime covered earnings of current or former married couples, as well as on earned retirement benefits of individuals. The reduced importance of auxiliary benefits (due to the higher lifetime covered earnings of women) and the increased proportion of divorced retirees make OASI more progressive--even as net benefits decline--for current and future cohorts than for cohorts who retired in the 1990s. Analysis of these findings suggests that simulations of policy changes in Social Security must take into account the decreasing importance of auxiliary benefits across birth cohorts and the complex changes in individuals' marital histories.     

Tax impact from elimination of the retirement test

The OASI eligibility provisions include a retirement test (or earnings test), and in 1979 aged beneficiaries who are under age 72 give up $1 in current benefits for each $2 of annual earnings above $4,500. If the retirement test were eliminated, total OASI payouts would increase because aged workers would no longer forfeit benefits. Aged workers also might increase earnings or delay retirement if this penalty on work effort were removed. Increased earnings would generate additional OASDHI taxes and individual income taxes. This article examines the fiscal effects on OASI benefit payouts and increased tax receipts if the retirement test were eliminated.     

Divorced women at retirement: projections of economic well-being in the near future.

The Modeling Income in the Near Term (MINT) data system projects retirement income for persons retiring in the 1990s through 2020. Using those data, we examine the economic well-being of divorced women at retirement. The MINT data system improves upon previous estimates of Social Security benefits by: Measuring and projecting years of marriage to determine if the 10-year requirement has been met, Projecting lifetime earnings until retirement and eligibility for Social Security retirement benefits, and Estimating lifetime earnings of former spouses. MINT also makes independent projections of each retiree's income from pensions, assets, and earnings (for working beneficiaries). As a result of changes in marital patterns, MINT projects that the proportion of women who are divorced will increase. At the same time, the proportion of those women who are eligible for auxiliary benefits is projected to decrease, for two main reasons. First, changes in women's earnings and work patterns result in more women receiving retired-worker benefits based on their own earnings. Second, an increased number of divorced women will not meet the 10-year marriage requirement for auxiliary benefits. Despite the projected decrease over time in eligibility rates for auxiliary benefits, the level of Social Security benefits is projected to change little between the older and younger birth cohorts of divorced women entering retirement. According to the MINT data, the most vulnerable of divorced women will be those who have not met the 10-year marriage requirement. Poverty rates will be higher for them than for all other divorced women. This group of divorced women is projected to grow as more and more women divorce from shorter marriages. With more women divorcing and with fewer divorced women meeting the 10-year marriage requirement, the proportion of economically vulnerable aged women will increase when the baby boom retires. Further research is warranted on this long neglected subject. Analyses of divorced women's economic well-being by major socioeconomic characteristics such as race and ethnicity and education are of particular interest. Such analyses can be supported by the MINT data system.     

Social Security's special minimum benefit

Social Security's special minimum primary insurance amount (PIA) provision was enacted in 1972 to increase the adequacy of benefits for regular long-term, low-earning covered workers and their dependents or survivors. At the time, Social Security also had a regular minimum benefit provision for persons with low lifetime average earnings and their families. Concerns were rising that the low lifetime average earnings of many regular minimum beneficiaries resulted from sporadic attachment to the covered workforce rather than from low wages. The special minimum benefit was seen as a way to reward regular, low-earning workers without providing the windfalls that would have resulted from raising the regular minimum benefit to a much higher level. The regular minimum benefit was subsequently eliminated for workers reaching age 62, becoming disabled, or dying after 1981. Under current law, the special minimum benefit will phase out over time, although it is not clear from the legislative history that this was Congress's explicit intent. The phaseout results from two factors: (1) special minimum benefits are paid only if they are higher than benefits payable under the regular PIA formula, and (2) the value of the regular PIA formula, which is indexed to wages before benefit eligibility, has increased faster than that of the special minimum PIA, which is indexed to inflation. Under the Social Security Trustees' 2000 intermediate assumptions, the special minimum benefit will cease to be payable to retired workers attaining eligibility in 2013 and later. Their benefits will always be larger under the regular benefit formula. As policymakers consider Social Security solvency initiatives--particularly proposals that would reduce benefits or introduce investment risk--interest may increase in restoring some type of special minimum benefit as a targeted protection for long-term low earners. Two of the three reform proposals offered by the President's Commission to Strengthen Social Security would modify and strengthen the current-law special minimum benefit. Interest in the special minimum benefit may also increase because of labor force participation and marital trends that suggest that enhancing workers' benefits may be a more effective means of reducing older women's poverty rates than enhancing spousal or widow's benefits. By understanding the Social Security program's experience with the special minimum benefit, policymakers will be able to better anticipate the effectiveness of other initiatives to enhance benefits for long-term low earners. This article presents the most recent and comprehensive information available about the special minimum benefit in order to help policymakers make informed decisions about the provision's future. Highlights of the current special minimum benefit include the following: Very few persons receive the special minimum benefit. As of December 2001, about 134,000 workers and their dependents and survivors were entitled to a benefit based on the special minimum. Of those, only about 79,000 received a higher total benefit because of the special minimum; the other 55,000 were dually entitled. (In effect, when persons are eligible for more than one type of benefit--that is, they are dually eligible--the highest benefit payable determines total benefits. If the special minimum benefit is not the highest benefit payable, it does not increase total benefits paid.) As of February 2000, retired workers who were special minimum beneficiaries with unreduced benefits and were not dually entitled were receiving, on average, a monthly benefit of $510 per month. That amount is approximately $2,000 less than the annual poverty threshold for an aged individual. Special minimum benefits provide small increases in total benefits. For special minimum beneficiaries who were not dually entitled as of December 2001, the average special minimum monthly PIA was just $39 higher than the regular PIA. Most special minimum beneficiaries are female retired workers. About 90 percent of special minimum beneficiaries are retired workers, and 77 percent of those retired workers are women. The special minimum benefit has never provided poverty-level benefits. Maximum payable special minimum benefits (unreduced for early retirement) equal 85 percent of the poverty level for aged persons, down from 96 percent at the provision's inception. Major public policy considerations raised by this analysis include the following: Social Security benefits alone do not protect all long-term low earners from poverty. Low earners with 30 years of earnings equal to the annual full-time minimum wage who retired in selected years from 1982 to 2000 received benefits that were 3.9 percent to 20.1 percent below the poverty threshold, depending on the year they retired. For 40-year earners, the range was 3.9 percent to 15.3 percent below poverty. Furthermore, in 1993, 29.2 percent of retired-worker beneficiaries who were poor had 30 or more years of coverage. The size of the universe of persistently low earners with significant attachment to the covered workforce is unknown. Available research that examines two 28-month periods suggests that only 4 percent to 6 percent of full-time, full-period earners had below-minimum wages for more than 12 consecutive months. Targeting enhanced benefits only toward long-term, regular workers who are low earners is difficult under the current Social Security program. All else being equal, if total wage-indexed lifetime covered earnings are the same for both a full-career low earner and for a high earner who has worked only occasionally, then their Social Security benefits will be identical. Social Security has no information on number of hours worked, hourly wages, or other information that could distinguish between two such persons.     

Income of new retired workers by age at first benefit receipt: findings from the New Beneficiary Survey

Using data from the New Beneficiary Survey (NBS) of the Social Security Administration (SSA), this article examines how income sources and total monthly income received by newly retired social security beneficiaries vary with the age at which the first benefit check was received. The NBS respondents who received a first benefit at age 65 or older were better off economically than were those who received a first benefit at ages 62-64. At the time of the interview, 18-30 months after receiving a first benefit, these older beneficiaries had higher levels of total income and were more likely to have income from earnings and assets. Pension receipt rates did not vary by the age at which the first social security benefit was received except for married women retired workers, for whom the rate was higher at the older ages. The largest proportion of aggregate income (slightly more than one-third) was derived from social security benefits. More than 90 percent of the NBS Medicare-only respondents--a sample of nonbeneficiaries who were eligible for monthly cash benefits but had established their entitlement only for the purpose of enrolling in the Medicare program--reported earnings income. They had lower rates of pension receipt and higher rates of asset income receipt than the retired workers. The Medicare-only respondents had substantially higher incomes than did retired workers, and most of their aggregate income was from earnings. The NBS retirees were generally in better financial condition than a group of social security beneficiaries aged 65 or older from all benefit categories in the Current Population Survey Income Supplement with whom they were compared.     

LONGEVITY‐RELATED OPTIONS FOR SOCIAL SECURITY: A MICROSIMULATION APPROACH TO RETIREMENT AGE AND MORTALITY ADJUSTMENTS

We consider the distributional implications of Social Security policy changes in the context of increases in life expectancy and differential mortality. Using a robust microsimulation model, we examine how several options for raising the retirement age, including a scenario that applies a mortality adjustment in combination with such policies, affect different types of individuals and households. Policy changes are simulated for Social Security beneficiaries in 2030 using the Modeling Income in the Near Term (MINT) microsimulation model. The analysis shows that increasing either the age at which individuals receive their full retirement benefit alone or the early eligibility and full retirement ages together result in across‐the‐board reductions in benefit levels. The policies are projected to result in slightly higher poverty, but the expected rise is sharper among groups known to experience higher rates of mortality, as well as many disadvantaged groups. Analysis of a hypothetical adjustment to offset the historical impacts of differential mortality by lifetime earnings on lifetime benefit receipt, when combined with these retirement age increases, shows varied results. While some groups of individuals experience sharper reductions in median monthly benefits, the adjustment has an offsetting and protective effect for the benefits of disadvantaged groups when combined with options that would raise the retirement age. This combined package of policies, as well as simulations that incorporate a behavioral adjustment in benefit claiming ages, result in an increase of less than one percentage point in the average poverty rate.     

Social Security Privatization and Market Risk

Under Social Security privatization, workers would be allowed to divert some of the money that currently goes to Social Security into private accounts. This would expose them to market risk, that is, the risk of a substantial drop in equity prices or of a prolonged bear market. This could result in generations of workers with less money than they thought they would have for retirement. Depending on a worker's birth date, if the privatization approach proposed by President Bush's Commission to Strengthen Social Security had been enacted at the start of the Social Security program, the retirement benefits generated from putting 10% of earnings in a private account for 35 years would have ranged from 100% to less than 20% relative to pre‐retirement earnings. The extraordinarily high retirement income generated from the booming 1990s stock market was the equivalent of winning the generational lottery—unlikely to be repeated regularly. Even under these beneficial circumstances, a privatized system could have cost the government more than $1 trillion in today's dollars over the past 3 decades if the government decided to help out those who accumulated too little for retirement. The primary alternative to a government bailout of the Social Security system, older workers working longer, would likely not generate the desired results. Workers wanting to work longer would create labor market pressures typically at times when unemployment is already high.     

Effect on benefits of earnings at ages 65 or older, 1995.

A major policy issue for the Social Security program is the treatment of earnings of persons who have attained retirement age. This article discusses the retirement test and recomputation of benefit provisions, and provides statistical data for 1995. In 1995, about 806,000 persons aged 65-70 had significant earnings resulting in the withholding of benefits by the retirement test. About 1,659,000 persons aged 65 or older realized an increase in their benefit amount because of their earnings.     

Characteristics of individuals with integrated pensions

Employer pensions that integrate benefits with Social Security have been the focus of relatively little research. Since changes in Social Security benefit levels and other program characteristics can affect the benefit levels and other features of integrated pension plans, it is important to know who is covered by these plans. This article examines the characteristics of workers covered by integrated pension plans, compared to those with nonintegrated plans and those with no pension coverage. Integrated pension plans are those that explicitly adjust their benefit structure to help compensate for the employer's contributions to the Social Security program. There are two basic integration methods used by defined benefit (DB) plans. The offset method causes a reduction in employer pension benefits by up to half of the Social Security retirement benefit; the excess rate method is characterized by an accrual rate that is lower for earnings below the Social Security taxable maximum than above it. Defined contribution (DC) pension plans can be integrated along the lines of the excess rate method. To date, research on integrated pensions has focused on plan characteristics, as reported to the Bureau of Labor Statistics (BLS) through its Employee Benefits Survey (EBS). This research has examined the prevalence of integration among full-time, private sector workers by industry, firm size, and broad occupational categories. However, because the EBS provides virtually no data on worker characteristics, analyses of the effects of pension integration on retirement benefits have used hypothetical workers, varying according to assumed levels of earnings and job tenure. This kind of analysis is not particularly helpful in examining the potential effects of changes in the Social Security program on workers' pension benefits. However, data on pension integration at the individual level are available, most recently from the Health and Retirement Study (HRS), a nationally representative survey of individuals aged 51-61 in 1992. This dataset provides the basis for the analysis presented here. The following are some of the major findings from this analysis. The incidence of pension integration in the HRS sample is 32 percent of all workers with a pension (14 percent of all workers). The HRS can also identify integrated DC plans, a statistic that is not available from BLS data. The rate of integration for workers with only DC plans is 8 percent. After controlling for other variables, several socio-demographic characteristics are significantly related to the incidence of integration. The probability of having an integrated pension is 4.6 percentage points less for men compared to women. Non-Hispanic blacks are 6.4 percentage points less likely than non-Hispanic whites to have integrated pensions. Union members are 14 percentage points less likely to have integrated pensions, while workers with less than a graduate level education are at least 15 percentage points more likely to have a pension that is integrated. Some earnings and pension characteristics are also significantly correlated with pension integration. Earnings are positively related, with the probability of having an integrated pension increasing by 2 percentage points for an increase of $1,000 in annual pay. An even larger effect comes from earning at or above the Social Security taxable maximum. Workers at or above this income level are 10 percentage points more likely to have an integrated plan, but for those with more than one plan the probability of pension integration goes up by 13 percentage points.     

Income of retirement-aged persons in the United States

This article reviews the composition and level of retirement income in the United States and how this has changed over time, focusing on two overlapping but distinct groups--the entire population aged 65 or older, and recent retirees. Changes in the composition of income of the aged over the past 20-30 years, including greatly expanded Social Security and pension coverage and an increasing number of persons with retirement savings, have improved the economic status of the aged not only in comparison with the aged in earlier years, but also in comparison with younger adults who derive most of their income from earnings. New retired workers are better off than the total aged population in several respects. The younger cohorts now in the labor force will spend more of their working lives in the more favorable conditions now present than was true of past new beneficiaries or the aged as a whole. It is, therefore, not unreasonable to expect that today's workers will enjoy more and larger pensions and increased income from savings to supplement their Social Security benefits when they retire.     

Economic security, 1935-85

The economic well-being of both working and retired persons has improved significantly since the Social Security Act was passed in 1935. More people are employed now than at any time since then, despite declining employment among the aged and more years of school attendance among the young. The ratio of non-workers to workers--a broad measure of dependency--is lower now than at any time since the 1930's. Social security has grown and matured to become a strong foundation of retirement income, and other work-related employee benefits have grown in tandem with social security. Employer contributions for social insurance and related employee benefits have grown from being about a 1-percent supplement to aggregate wages and salaries in 1929 to nearly 20 percent today. Social security and Medicare account for just over a fourth of employer contributions, while other public and private retirement systems represent just over another fourth. The balance of benefits for active workers includes group health and life insurance, unemployment insurance, workers' compensation, temporary disability insurance, and related benefits. Pay for holidays, vacations, and sick leave is estimated to have increased from less than 1 percent of aggregate pay in 1929 to about 10 percent today. The improved economic status of the aged has been documented by a series of surveys beginning in 1941-42 and carried out from time to time until 1972 and biennially since 1976. The earlier surveys were supplemented with estimates from record data and tables from the Bureau of the Census. The income of the aged as a whole has grown by about 75 percent over the past 2 decades after taking inflation into account. The income of the aged as a whole grew faster than that of the nonaged in the 1970's and early 1980's when real social security benefits increased faster than inflation and wages lagged behind it. New beneficiaries in 1982 were in better health and were more likely to retire because they wanted to than was true of their counterparts in the early 1940's. Not only have benefits continued to be the main component of income of the aged as total incomes have grown, but also benefits have become much larger in relation to average earnings than used to be the case. Retired workers are much more likely now than in the early 1940's to have other pensions or income from assets to supplement benefits.(ABSTRACT TRUNCATED AT 400 WORDS)     

Coping with the demographic challenge: fewer children and living longer

Due to demographic changes, the U.S. Social Security system will face financial challenges in the near future. Declining fertility rates and increasing life expectancies are causing the U.S. population to age. Today 12 percent of the total population is aged 65 or older, but by 2080, it will be 23 percent. At the same time, the working-age population is shrinking from 60 percent today to a projected 54 percent in 2080. Consequently, the Social Security system is experiencing a declining worker-to-beneficiary ratio, which will fall from 3.3 in 2005 to 2.1 in 2040 (the year in which the Social Security trust fund is projected to be exhausted). This presents a significant challenge to policymakers. One policy option that could help keep the Social Security system solvent is to reduce retirement benefits, either by raising the normal retirement age or through life expectancy indexing, to reflect the fact that people are living longer. However, these reductions in benefits have the potential to harm economically vulnerable retirees. Other options, such as progressive price indexing proposals, explicitly protect the retirement benefits of low lifetime earners. Still other options would seek to raise additional revenue for the system. Since individuals will be living longer in retirement, many policymakers believe it is important to encourage older workers to delay retirement so that they can maintain a quality standard of living throughout their retirement. One proposal to encourage continued work would be to increase the early eligibility age for Social Security benefits from age 62 to age 65. This could possibly hurt individuals who need to retire from physically demanding jobs but would ensure that people receive higher benefit amounts once they were able to fully retire. Other proposals that could promote more work at older ages include expanding phased retirement options and reforming pension and defined contribution systems to create incentives to work and save.