Disability benefit coverage and program interactions in the working-age population

Over three-fourths of the working-age population in the United States is insured for Disability Insurance (DI); this group is protected against a total loss of earned income typically associated with severe disability. However, little is known about the role the Supplemental Security Income (SSI) program plays in protecting against the financial consequences of severe disability for this population. We find that over one-third (36 percent) of the working-age population is covered by SSI in the event of a severe disability. Three important implications follow, which we discuss in sequence below: (1) SSI increases the overall coverage of the working-age population; (2) SSI enhances the bundle of cash benefits available to disabled individuals; and (3) interactions with other programs also enhance the safety net, most notably in the area of health insurance coverage. Ignoring these implications could lead to inaccurate inferences about disability program coverage, health insurance coverage, and the well-being of working-age individuals with disabilities. The first major finding is that SSI substantially increases overall cash benefit coverage. Thus SSI dramatically increases protection against the financial risk of disablement in the working-age population. While roughly 23 percent of the U.S. working-age population was not insured for DI in November 1996, SSI provides coverage for more than half of this seemingly "uncovered" population. An important innovation of our analysis is that we account for the possibility that many of those who appear ineligible for SSI based on current income could become eligible as a result of a disability shock that causes their earnings to drop. Thus the estimated proportion that is protected by SSI increases when the possibility of earnings loss because of disability is considered. Considering DI and SSI together, roughly 90 percent of the working-age population would be potentially covered for benefits in the event of a disability. Those who are covered by SSI--as opposed to those covered by DI alone-tend to be relatively young, less educated, and in relatively poor health. The remaining 10 percent or so are not covered by either DI or SSI. This group is economically vulnerable in some sense (they are poorer, older, and more likely to be women than those covered only by DI), but they are not as economically vulnerable in terms of income, resource holdings, and private health insurance coverage as those who are eligible for SSI. A disproportionate share of those who are not covered by either DI or SSI consists of married women. The second major finding is that SSI substantially enhances the bundle of available cash benefits. Roughly one-third of those covered by DI are initially covered by SSI as well. SSI enhances the bundle of available cash benefits through two mechanisms: (1) SSI provides cash payments during the 5-month DI waiting period, and (2) SSI supplements the DI benefit after the DI waiting period for people whose initial SSI payment is larger than the DI benefit. We find that the role of SSI cash payments is temporary for most of those who are initially covered by both SSI and DI: They would receive SSI during the DI waiting period, but would lose SSI eligibility afterwards because the higher DI benefit completely offsets the SSI benefit. However, a smaller group of DI beneficiaries with low DI benefit levels would continue to be covered by both SSI and DI after the DI waiting period because the relatively low DI benefit would not completely offset the SSI benefit. The third major finding is that interactions with other programs also substantially enhance the safety net. The most important interactions involve health insurance coverage. In the working-age population, Medicare is available to DI beneficiaries, but only after a 24-month waiting period. By contrast, SSI is an important pathway to Medicaid benefits for severely disabled adults with limited income and resources and has no waiting period. SSI can provide a pathway to health insurance coverage during the 24-month Medicare waiting period for some DI beneficiaries through providing access to Medicaid. Interactions with other programs, such as Temporary Assistance for Needy Families (TANF), Food Stamp, Unemployment Insurance (UI), workers' compensation (WC), and veterans' disability programs, modify the role of DI and SSI in protecting people against the adverse financial effects of disablement. The nature of the interactions with other programs differs depending on individual circumstances. Employment-related programs (including UI, WC, and veteran's disability programs) are particularly important for those who are covered by DI. By contrast, the means-tested programs (including TANF and Food Stamp) are more important for those who would be eligible for SSI. In conclusion, SSI plays a substantial role in protecting working-age people against the adverse financial consequences of disablement through three mechanisms: (1) providing coverage to many who are not DI insured; (2) providing additional cash benefits to many who are DI insured and also covered by SSI; and (3) enhancing the social safety net by interacting with other programs, most notably Medicaid. Through these mechanisms, the role of SSI is substantial enough that it cannot be safely ignored in econometric and policy research on DI.     

Pain Management and Work Capacity: Evidence From Workers’ Compensation and Marijuana Legalization

We study whether the work capacity of the older working population responds to improved pain management therapy access. We use the adoption of state recreational marijuana laws (RMLs) as a large policy shock to access to a non-pharmaceutical pain management option. We focus on workers’ compensation cash benefit receipt as a measure of work capacity, finding that receipt declines in response to RML adoption. Workers’ compensation cash benefits are awarded to workers who require time away from work to recover from an injury, which arguably captures a policy-relevant aspect of work capacity. We observe similar shifts in complementary proxies for work capacity, including work-limiting disability rates. After considering a range of alternative mechanisms, the evidence suggests that the primary driver of the reductions in workers’ compensation benefits is improvements in work capacity.     

Physically demanding occupations, health, and work after retirement: findings from the New Beneficiary Survey

This article uses data on a recent cohort of Social Security retired-worker beneficiaries to examine the predictors of work after initial receipt of benefits. It focuses on two factors: an analysis of the effects of ill health and of employment in a physically demanding occupation in the year preceding receipt of benefits. Based on responses received during the Social Security Administration's New Beneficiary Survey, the employment of men in a physically demanding occupation is associated with a lower probability of work in retirement; the existence of a work-limiting health condition also lowers their probability of work. Full-time, full-year workers in 1979 who had changed jobs in the years just preceding the receipt of Social Security benefits were more likely to work after they became beneficiaries. It may be that workers anticipate constraints on their ability to continue working on a job and reduce the effect of those constraints through earlier job changes. The finding that the work effort of women beneficiaries is not affected by previous employment in occupations identified as physically demanding may signify the failure of customary physical demand indices to measure stress on those jobs in which women are most likely to be employed.     

Receipt of multiple benefits by disabled-worker beneficiaries

In 1971, 44 percent of workers who had been currently entitled to social security disability insurance (DI) benefits for 1 year or more also received benefits from at least one other source. Their average disability insurance benefit was higher than that of persons who received only DI benefits. On the average, total benefits to those receiving multiple benefits were double the amounts paid to those receiving only DI benefits. The combined benefits for the former produced median replacement rates about 50 percent larger than the median replacement rates for the latter. High replacement rates--defined here as more than 80 percent of predisability earnings replaced by benefit--predominate among those with multiple benefits. Considering replacement rates based solely on disability insurance benefits substantially understates the extent to which benefits from public and private programs actually replace predisability earnings. Replacement rates based solely on DI benefits are generally higher for those receiving DI benefits only than for persons receiving multiple benefits. Limiting DI benefits to the replacement rate from DI benefits alone is disadvantageous for persons who receive only DI benefits, compared with those who also receive other benefits.     

The effects of state policy design features on take-up and crowd-out rates for the State Children's Health Insurance Program.

We evaluate the effects of state policy design features on SCHIP take-up rates and on the degree to which SCHIP benefits crowd out private benefits. The results indicate overall program take-up rates of approximately 10 percent. However, there is considerable heterogeneity across states, suggesting a potential role of inter-state variation in policy design. We find that several design mechanisms have significant and substantial positive effects on take-up. For example, eliminating asset tests, offering continuous coverage, simplifying the application and renewal processes, and extending benefits to parents all have sizable and positive effects on take-up rates. Mandatory waiting periods, on the other hand, consistently reduce take-up rates. In all, inter-state differences in outreach and anti-crowd-out efforts explain roughly one-quarter of the cross-state variation in take-up rates. Concerning the crowding out of private health insurance benefits, we find that between one-quarter and one-third of the increase in public health insurance coverage for SCHIP-eligible children is offset by a decline in private health coverage. We find little evidence that the policy-induced variation in take-up is associated with a significant degree of crowd out, and no evidence that the negative effect on private coverage caused by state policy choices is any greater than the overall crowding-out effect. This suggests that states are not augmenting take-up rates by enrolling children that are relatively more likely to have private health insurance benefits.     

The U.S. study of work incapacity and reintegration

In many countries, including the United States, the number of persons being awarded long-term or permanent disability benefits has risen dramatically in recent years. Government agencies, advocates for the disabled, and others are looking for ways to help persons with disabilities return to the labor force. The Work Incapacity and Reintegration (WIR) Study was developed to address that issue. The United States and five other countries--Germany, Denmark, Sweden, Israel, and the Netherlands--have participated in a cross-national study of work incapacity under the auspices of the International Social Security Association. The study had two objectives: to examine the factors that influence the pattern of work resumption among persons disabled by a back condition and to identify the medical and nonmedical interventions that are most effective in helping such persons reenter the labor force. Samples for the U.S. national study were drawn from four cohorts: Social Security Disability Insurance (DI) beneficiaries, Supplemental Security Income (SSI) beneficiaries, and recipients of temporary disability insurance (TDI) benefits from the states of California and New Jersey. Only the TDI recipients were included in the comparative study. This article discusses the study design and methodology and summarizes the findings of the U.S. national study. Findings from the U.S. study show significant differences between the two cohorts in terms of work resumption and other characteristics. The proportions of respondents from the TDI cohorts who were working at the third and final study contact ranged from 53 percent to 65 percent, compared with less than 5 percent of the DI and SSI respondents. Respondents from the DI and SSI cohorts were on average about 10 years older than the TDI respondents, were less well educated, and reported more physical demands in their usual work. They also reported lower levels of functional capacity, higher levels of pain, and a much greater tendency to have other chronic illnesses. The types of medical treatments provided were remarkably uniform across cohorts and, within cohorts, between those who did and did not resume working. Thus, no medical intervention was identified that showed a significantly higher success rate in terms of facilitating a return to work. However, changes made in the work environment by the employer were an important factor in work reintegration; about 80 percent of respondents who resumed working did so with the help of workplace accommodations. In addition, since respondents with fewer physical demands in their job were more likely to return to work, there appears to be some potential for job retraining as a means of promoting a return to work. The Social Security Administration should consider these findings in developing strategies to help disabled workers reenter the labor force.     

The erosion of retiree health benefits and retirement behavior: implications for the disability insurance program

The effects of retiree health insurance on the decision to retire have not been examined until recently. It is an area of increasing significance because of rising health care costs for retirees, the uncertain future of Medicare, and increased life expectancy. In general, studies suggest that individual retirement decisions are strongly responsive to the availability of retiree health insurance. Early retiree benefits and retirement behavior are also important because they may affect the Social Security Disability Insurance (DI) program. It is not apparent that if a person loses retiree health benefits, or if fewer people are eligible for retiree health benefits in general, claims for DI will increase. The potential 2-year loss of health benefits may be a deterrent to leaving the labor force and claiming DI, although persons who are unable to work would leave the labor force even without health benefits. In order to understand how the decline in retiree health benefits may affect enrollment in DI, analysts must at least incorporate the role of coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). That act provides many people with access to health insurance during the 2-year gap between eligibility for DI and Medicare. In fact, persons with sufficient means to retire early could use the income from Disability Insurance to buy COBRA coverage during the first 2 years of DI coverage. Determining the effect of the erosion of retiree health benefits on DI must account properly for the role of other factors that affect DI eligibility and participation. The financial incentives of Social Security, pension plans, retirement savings programs, health status, the availability of health insurance, and other factors influencing retirement decisions must be taken fully into account in order to isolate the precise effect of retiree health benefits.     

Recent trends in workers' compensation

Workers' compensation provides cash benefits and medical care to employees who are injured on the job and survivor benefits to the dependents of workers whose deaths result from work-related incidents. Workers' compensation programs in the 50 states and the District of Columbia and federal programs together paid $56.0 billion in medical and cash benefits in 2004, an increase of 2.3 percent over 2003 payments. Of the total, $26.1 billion was for medical care and $29.9 billion was for cash benefits. Employers' costs for workers' compensation in 2004 were $87.4 billion, an increase of 7.0 percent over 2003 spending. Workers' compensation programs and spending vary greatly from state to state. As a source of support for disabled workers, workers' compensation is currently surpassed in size only by Social Security Disability Insurance (DI), which covers impairments of any cause that are significant, long-term impediments to work. Although most recipients of workers' compensation recover and return to work, those with lasting impairments may become eligible for DI benefits, subject to an offset to avoid excessive wage replacement from both programs.     

Early retirees under Social Security: health status and economic resources

Some proposals to change the Social Security program to ensure long-run solvency would reduce or eliminate benefits for early retirees. This article documents the health and financial resources of Old-Age and Survivors Insurance (OASI) beneficiaries aged 62-64. It identifies a substantial minority of early retirees who might be economically vulnerable if either the early eligibility age or normal retirement age was raised. Attention is directed at the extent to which poor health limits work in this age group and the extent to which curtailment of early OASI benefits might lead to increases in the Disability Insurance (DI) program rolls. Using a set of comprehensive health measures, we estimate that over 20 percent of OASI beneficiaries aged 62-64 have health problems that substantially impair their ability to work. This finding implies that in this age range, as many severely disabled persons receive OASI benefits as disability benefits. In fact, 12 percent of early beneficiaries would meet a more stringent criterion for being classified "disabled"--SSA's medical standard for disability benefits. The evidence therefore indicates that OASI functions as a substantial, albeit unofficial, disability program for early retirees. Compared with those who have no health problems or are less severely impaired, early OASI beneficiaries who meet the medical criteria for disability benefits are more likely to be living alone and more likely to be poor or "near poor." The great majority of the group--almost 80 percent--are women. Analysis of their earnings histories suggests that most of these beneficiaries do not satisfy the insured-status requirements for Disability Insurance benefits. The article considers the different roles of the OASI program and the DI program for health-impaired individuals aged 62-64. Disability modelers sometimes overlook an important aspect of program administration. Under customary screening procedures implemented in Social Security field offices, applicants for early OASI benefits who appear to be severely impaired simultaneously apply for DI benefits if they are disability insured. If they are found eligible for DI benefits, those applicants become DI beneficiaries. The implication is that raising the earliest entitlement age would have little impact on the DI rolls. Unless there are changes in eligibility criteria, the DI program would not serve as a safety net for many of the most severely disabled early retirees.     

Actuarial status of the OASI (old age survivors insurance) and DI (disability insurance) Trust Funds

This article summarizes the current financial condition and actuarial status of the Old-Age, Survivors, and Disability Insurance (OASDI) program, as shown in the 1987 Annual Report of the Board of Trustees. The Trustees note that the assets of the OASI and DI Trust Funds, on a combined basis, will be sufficient to permit the timely payment of OASDI benefits for many years into the future, on the basis of all four sets of assumptions shown in the report. For the next 75 years, the estimates show that the OASDI program, overall, is in close actuarial balance, based on the two intermediate sets of assumptions. The DI program by itself, however, is not in close actuarial balance for the next 75 years. The actuarial deficit for the DI program could be remedied by a small reallocation of the contribution rate from OASI to DI, in such a way that the OASI program would remain in close actuarial balance and OASDI benefits would not be affected. Although the Trustees are not recommending such a reallocation, they note that the financial condition of the DI program will need to be carefully monitored.     

Actuarial status of the OASI and DI Trust Funds

This article summarizes the current financial condition and actuarial status of the old-age, survivors, and disability insurance (OASDI) program, as shown in the 1986 Annual Report of the Board of Trustees. The Trustees note that the assets of the OASI and DI Trust Funds will be sufficient to permit the timely payment of OASDI benefits for many years into the future, on the basis of all four sets of assumptions shown in the report. For the next 75 years, the estimates show that the OASDI program, overall, is in close actuarial balance, based on the two intermediate sets of assumptions. The DI program by itself, however, is not in close actuarial balance for the next 75 years. The actuarial deficit for the DI program could be remedied by a small reallocation of the contribution rate from OASI to DI, in such a way that the OASI program would remain in close actuarial balance and OASDI benefits would not be affected. Although the Trustees do not at this time recommend such a reallocation, they note that the financial condition of the DI program will need to be carefully monitored for the next several years.     

Expanding access to health care for Social Security Disability Insurance beneficiaries: early findings from the accelerated benefits demonstration

Most Social Security Disability Insurance (DI) beneficiaries must complete a 5-month waiting period before they become entitled to DI cash benefits and an additional 24-month waiting period before Medicare benefits begin. The Accelerated Benefits (AB) demonstration is a randomized experiment designed to test the effects of providing newly entitled DI beneficiaries who do not have health insurance with a generous health benefits package during the Medicare waiting period. This article presents early findings on the prevalence of health insurance coverage among newly entitled beneficiaries and the characteristics of those without health insurance. It also examines the effects of AB on health care utilization, the extent to which AB reduces unmet medical needs, and the costs of providing the AB health benefits package.     

Recent trends in the Social Security Disability Insurance Program

Earlier analysis documented the rapid growth of the Disability Insurance (DI) program from 1966 to 1975; this article discusses trends since 1975. Over the decade of the 1970's, the population insured for disability increased by 34 percent, and women as a proportion of the insured population rose from 32.4 percent in 1970 to 39.1 percent in 1980, reflecting the increase in female labor-force participation. Of disabled workers receiving benefits, the proportion that were women rose from 28.4 percent in 1970 to 32.4 percent in 1979. Although inflation caused total benefit costs to rise over the entire period, the number of DI beneficiaries began to decline in 1978. Disabled-worker awards reached a peak in 1975 and fell subsequently so that the 1969 and 1981 figures are approximately equal. Relative to 1970, the fraction of awards going to women increased, the share for persons aged 50-54 rose, and the proportion received by those aged 60-64 declined. Decreased in total awards, and hence recipients, stemmed primarily from higher rates of denial at both the initial application and the reconsideration stages. Higher denials were countered by substantial rises in the number of hearings and reversals by administrative law judges (ALJ's). in 1980, only 65 percent of all awards came from initial applications, while over a fourth resulted from ALJ reversals. In future years, recent legislative changes may be expected to curtail program expansion further.     

Health status of new retired-worker beneficiaries: findings from the New Beneficiary Survey

In general, individuals who first received social security retired-worker benefits in June 1980-May 1981 viewed themselves as being in good health. They reported this view in response to questions in the 1982 New Beneficiary Survey conducted by the Social Security Administration. Two-thirds of the respondents in the retired-worker sample reported having no health-related work limitations and no moderate or severe functional activity limitations. However, more than half of those who did report such limitations indicated that the limitations were severe enough to keep them from any work for pay. Beneficiaries whose first monthly benefits were claimed at age 62 were more likely to report themselves in poor health than those receiving a first benefit at age 63 or older, but even among the 62-year-olds, more than three-fifths reported no work-limiting conditions.     

Do Alternative Base Periods Increase Unemployment Insurance Receipt Among Low‐Educated Unemployed Workers?

Unemployment Insurance (UI) is the major social insurance program that protects against lost earnings resulting from involuntary unemployment. Existing literature finds that low‐earning unemployed workers experience difficulty accessing UI benefits. The most prominent policy reform designed to increase rates of monetary eligibility, and thus UI receipt, among these unemployed workers is the Alternative Base Period (ABP). In 2009, the American Recovery and Reinvestment Act sought to increase use of the ABP, making ABP adoption a necessary precondition for states to receive their share of the $7 billion targeted at UI programs. By January 2013, 40 states and the District of Columbia had adopted the ABP despite the absence of an evaluation of ABP efficacy using nationally representative data. This study analyzes Current Population Survey data from 1987 to 2011 to assess the efficacy of the ABP in increasing UI receipt among low‐educated unemployed workers. We used a natural‐experiment design to capture the combined behavioral and mechanical effects of the policy change. We found no association between state‐level ABP adoption and individual UI receipt for all unemployed workers. However, among part‐time unemployed workers with less than a high school degree, adoption of the ABP was associated with a 2.8 percentage point increase in the probability of UI receipt.     

Earnings histories of SSI beneficiaries working in December 1997.

Disabling conditions previously considered to be permanent and total are no longer viewed as automatic barriers to work. Medical advances, improved accommodations in the workplace, and changes in the nature of work for the working disabled have allowed many disabled people to rejoin the workforce. The Social Security Administration (SSA) has followed those developments with a view toward encouraging people receiving disability benefits to consider returning to work. To effectively target SSA's efforts and evaluate their success, information about previous work histories of the Supplemental Security Income (SSI) beneficiary population is used to provide baseline data. This article examines the earnings histories of 300,000 disabled SSI beneficiaries--one of the populations targeted by the expanded work-incentive measure under Public Law 106-70--who were working in December 1997. The article also investigates whether beneficiaries who are working have significant lifetime earnings and whether earnings patterns exist that might assist with SSA's work-support activities. SSI program records were matched to data in the Master Earnings File to explore the characteristics and earnings patterns before and after a person applies for benefits. The article addresses several questions: What are the general characteristics of disabled SSI beneficiaries? What are their earnings histories? Did they have an earnings record when they applied for SSI? Of the SSI beneficiaries working in December 1997, most tended to be younger than other disabled beneficiaries, to have some sort of mental disability, and to have earnings well below levels that would suggest their eventual, complete independence from the SSI cash benefits program. A look at past covered earnings revealed that the vast majority of SSI workers had a history of earnings before they applied for SSI benefits. Despite their severe impairments and age at the time of first eligibility, nearly 40 percent had earnings in 11 years or more. The amounts of those earnings were quite low, however, and were usually not high enough to preclude SSI eligibility. Examining the years immediately before and after the point of application indicated whether recent pre-application earnings were consistent with post-application return to work. Results were a bit surprising. They revealed that one-third of the 1997 SSI workers had no earnings, and another 28 percent returned to work despite having no earnings in the 4-year period before application. Persons receiving SSI because of mental retardation seemed to have poorer earnings histories than other workers but were more likely to return to work after application. That may be explained by their younger ages or may reflect the outside assistance they received in responding to SSA work incentives.     

Why triggers fail (and what to do about it): An examination of the unemployment insurance extended benefits program

During periods of high unemployment, many workers exhaust their unemployment insurance (UI) benefits before regaining employment. To help alleviate this problem, Congress created the extended benefits (EB) program, expanding the number of weeks of benefits available to UI recipients in high unemployment states. The EB program operates by “triggering on” additional weeks of benefits in states where unemployment and UI benefit receipt are above federally established thresholds. We analyze the performance of the EB program by creating a series of policy simulations using weekly UI claims and unemployment data from the program's inception in 1970 through the most recent economic expansion in 2005. Overall, we find that EB triggers, as currently constructed, fail as a policy tool for extending UI benefits. Minor adjustments to the triggers are unlikely to be effective. We develop an alternative set of “fix point” triggers that allow the EB program to trigger on and off in a more timely fashion. These triggers outperform all previously legislated triggers as well as other commonly proposed triggering mechanisms on criteria of timeliness, breadth, and duration. © 2006 by the Association for Public Policy Analysis and Management     

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.     

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.     

Variation of employee benefit costs by age

Health care, pension, and disability plans account for the bulk of employers' benefit costs, as defined in this article. Because those costs tend to rise as employees get older, the age structure of the workforce affects not only employers' costs but ultimately their competitiveness in global markets. How much costs vary depends in large part on the structure of the benefits package provided. The method a company chooses to finance benefits generally varies with its size. This article focuses primarily on the benefit practices of large, private employers. In the long run, such employers pay the costs associated with the demographics of their workers, whereas small employers can often pool costs with other companies in the community. In addition, small employers often offer fewer benefits, and the costs and financing of those benefits are subject to the insurance markets and state regulations. The discussion of benefit packages is illustrated by case studies based on benefits that are typical for three types of organizations--a large traditional company such as steel, automobile, and manufacturing; a large financial services company such as a bank or health care organization; and a medium-sized retail organization. The case studies demonstrate the extent to which the costs of typical packages vary and reveal that employers differ radically in the incentives they offer employees to retire at a specific time. An employer can shift the variation in cost by age by changing the structure of the benefit program. The major forces that drive age differences in benefit costs are the time value of money (the period of time available to earn investment income and the operation of compound interest) and rates of health care use, disability, and death. Those forces apply universally, in the United States and elsewhere, and they have not changed in recent years. However, the marketplace and the prevalence of various types of benefit programs have changed, and those changes have generally resulted in less cost variation by age and more frequent employer selection of benefit packages that exhibit less variation by age.