social security current reform proposals: how they would affect people with disabilities consortium...
TRANSCRIPT
Social Security
Current Reform Proposals: How They Would Affect People With Disabilities
Consortium for Citizens with Disabilities June 1, 2011
Social Security
Background on the Social Security Programs
June 2011 Consortium for Citizens with Disabilities 2
Social Security 54.2 million people receive
Social Security benefits from the retirement, disability, and survivors programs
More than one-third of all monthly checks go to non-retired individuals
June 2011 Consortium for Citizens with Disabilities 3
Social Security Insurance Retirement – insures against poverty
after worker retires Includes retirees with disabilities Spouses, including those with disabilities Disabled Adult Children
Example of people with increased reliance on Social Security benefits Parents of children with disabilities with
reduced earnings and savings due to care giving
June 2011Consortium for Citizens with
Disabilities 4
Social Security Insurance (continued) Survivors – provides benefits to dependents
after an insured individual (worker, disability insurance or retirement insurance beneficiary) dies Minor children and spouses of
deceased workers and retirees Disabled widow(ers) Disabled adult children
June 2011 Consortium for Citizens with Disabilities
5
Social Security Insurance (continued)
Disability – insures against loss of ability to work due to disability
Disabled workers, their spouses and children, including disabled adult children
Essential protection Millions of families face disability Adults with serious disabilities have very low
employment rate Poverty rates twice as high for workers with
disabilities as other groups who receive Social Security
Equals half or more of TOTAL family income for about half of disabled worker beneficiaries
June 2011Consortium for Citizens with
Disabilities 6
Current Design: The Positives
Fixed monthly payment Ability to move among three programs:
work history, age, & eligibility category Pay multiple family members based on
one worker’s earnings Adjusted annually for inflation
(generally) June 2011 Consortium for Citizens with
Disabilities7
Social Security
Background on Financing and Long-Term
Solvency Consortium for Citizens with
DisabilitiesJune 2011 8
Social Security & the Deficit
National groups examining ways to reduce deficit, including Social Security changes
Social Security did NOT cause the deficit Cutting benefits will NOT solve budget
crisis Cutting benefits will deepen financial
crisis for many people with disabilities June 2011
Consortium for Citizens with Disabilities 9
Social Security & the Deficit
Social Security did NOT cause the deficit: It is self-funded By law, it can only spend money
dedicated to the program No borrowing authority
June 2011 Consortium for Citizens with Disabilities 10
June 2011 Consortium for Citizens with Disabilities 11
Social Security’s Finances It is NOT a crisis Social Security does face a long-term financing shortfall
Only modest changes are needed to address shortfall
Current & Future Surplus
Surplus = invested assets or Trust Fund reserves
$2.6 trillion by end 2010 Will continue to grow 2011-2022 Projected to reach $3.7 trillion by
2022 June 2011
Consortium for Citizens with Disabilities 12
Projected Shortfall Over 75 Years
Less than 1 percent of Gross Domestic Product (GDP)
Another measure = 2.22 percent of taxable payroll
Previous Trustees’ forecasts = similar projection
June 2011Consortium for Citizens with
Disabilities 13
June 2011Consortium for Citizens with
Disabilities 14
Future Projections
Pay 100% of scheduled benefits 2011 Trustees Report: until 2036
Pay reduced benefits (if no action taken) 2011 Trustees Report: 77% of
scheduled benefits starting 2037
Social Security
Background: How Social Security Benefits
Are Calculated
Consortium for Citizens with DisabilitiesJune 2011 15
How Social Security Benefits Are Calculated
Benefit calculations under all programs (retirement, disability, survivors) use the same benefit formula
Benefit formula is used to calculate Primary Insurance Amount or PIA
June 2011Consortium for Citizens with
Disabilities16
How Social Security Benefits Are Calculated (continued) Calculated based on the
earnings of the worker Worker must have enough
credits, or “quarters of coverage,” to be eligible
Must have paid in 40 quarters or 10 years to be fully insured
June 2011Consortium for Citizens with
Disabilities17
How Social Security Benefits Are Calculated (continued) Younger workers qualify under
the disability or survivor programs with fewer credits
Exact number of quarters required is dependent on the age of the worker at the time of disability or death
June 2011Consortium for Citizens with
Disabilities18
How Social Security Benefits Are Calculated (continued) Social Security benefit amount is
based on the worker’s average earnings over their years of work
Retirement Benefit: Based on 35 years “Zero years” included if less than 35
years Lowest years “dropped” out (if more
than 35)June 2011
Consortium for Citizens with Disabilities
19
How Social Security Benefits Are Calculated (continued)
Disability and survivors benefits: Number of years based on age of worker at onset of disability or death Use “elapsed” years
The number of full calendar years since the person turned 21
If age 47 or over – get 5 “dropped” years Under age 47 – get 4 or less “dropped”
yearsJune 2011
Consortium for Citizens with Disabilities
20
How Social Security Benefits Are Calculated (continued) Once earnings determined, SSA
“indexes” the person’s earnings Done to update earnings to current
levels Reflects earnings increases in average
wage levels for each year Calculation results in Average
Indexed Monthly Earnings or AIME June 2011
Consortium for Citizens with Disabilities
21
How Social Security Benefits Are Calculated (continued)
Plug AIME into benefit formula Formula Replaces Percentage of AIME – Current
Formula (2011) 0-$749 = Replace 90% $749-$4517 = Replace 32% $4517 and up to taxable max = Replace 15%
Dollar amounts at which replacement percentage changes ($749, $4517) are known as “bend points”
June 2011 Consortium for Citizens with Disabilities
22
How Social Security Benefits Are Calculated (continued)
Bend points change every year Replacement percentages in
formula set by statute and do not change unless Congress changes them
June 2011 Consortium for Citizens with Disabilities
23
How Social Security Benefits Are Calculated (continued)
This calculation determines Primary Insurance Amount (PIA):
Retirement Program Get full PIA as monthly benefit if retire at your Full
Retirement Age (FRA) – also sometimes referred to as Normal Retirement Age (NRA)
Benefit is reduced if retire before then – amount of reduction based on how long before reach full retirement age begin to collect benefits
Youngest age at which benefits can be collected is known as Early Retirement Age or ERA June 2011 Consortium for Citizens with
Disabilities24
How Social Security Benefits Are Calculated (continued) Disability and survivors benefits are
calculated as if someone retires at FRA Based on the full PIA Not reduced regardless of age at which
disability onset or death occurs PIA is also plugged into another
formula to determine “family maximum” to determine benefits of family members
June 2011 Consortium for Citizens with Disabilities
25
Benefits Are Large Percent of Income for Lower Income Retirees
June 2011Consortium for Citizens with
Disabilities 27
Proposals and Options for Achieving Long-Term
Solvency of the Social Security Programs
June 2011Consortium for Citizens with
Disabilities 28
June 2011Consortium for Citizens with
Disabilities 29
Possible Options: Solvency
Two approaches, but could combine options from each:
Cut benefits Increase revenue
What Is Needed to Achieve Long-Term Solvency
Often looked at as a percentage of payroll
As stated earlier: Need revenue increases or benefit cuts = to 2.22% of taxable payroll to make up shortage
Will explain how much of the shortfall each option will solve (as available)
June 2011 Consortium for Citizens with Disabilities 30
Major Reform Proposals to Date
National Commission on Fiscal Responsibility and Reform – known as Bowles/Simpson Recommendations of Co-Chairs only Commission Member Representative Jan
Schakowsky (D-IL) also made recommendations
Bipartisan Policy Center Debt Reduction Taskforce – known as Rivlin/Domenici
June 2011 Consortium for Citizens with Disabilities 31
Proposal 1: Change the Benefit Formula
Achieve program savings by changing the replacement percentages in the benefit formula
Can be done: Progressively: Change the replacement
percentages for top earners only (i.e., decrease the percentage)
Regressively: Change the replacement percentages for all earners
June 2011 Consortium for Citizens with Disabilities
33
Proposal Specifics: Bowles/Simpson
Bowles/Simpson (new formula) $0-$9,000 = 90% replacement $9,000 - $38,000 = 30% $38,000 - $64,000 = 10% $64,000 - max = 5%
Based on annual earnings rather than AIME Results in benefit cuts for everyone with
average annual earnings over $9,000 Restores 0.86% of taxable payroll or 39% of
shortfall
June 2011Consortium for Citizens with
Disabilities 34
Proposal Specifics: Rivlin/Domenici
Rivlin/Domenici (new formula) $0-$749 = 90% replacement $749 - $4,517 = 32% $4,517 - max = 10%
Results in benefit cuts only for those beneficiaries with average monthly earnings over $4,517 ($54,204/year)
Restores 0.07% of payroll or 3.2% of shortfall
June 2011 Consortium for Citizens with Disabilities
35
Impact on People with Disabilities
Any change to the benefit formula that decreases the replacement percentages will result in benefit cuts to people with disabilities in all benefit programs – retirement, disability, survivors
June 2011 Consortium for Citizens with Disabilities
36
Other Possible Formula Changes Resulting in Benefit
Cuts Increase the number of years
used in calculating the AIME Change from wage indexing to
price indexing when calculating the AIME
Not included in proposals discussed today
June 2011 Consortium for Citizens with Disabilities
37
Proposal 2: Change the Retirement Age Current FRA (full retirement age) –
66 for current retirees – up from 65 Under current law, gradually being
raised to 67 for all people born after 1960
Current ERA (early retirement age) 62 for all retirees Not set to increase under current law
June 2011 Consortium for Citizens with Disabilities
38
Proposal Specifics Bowles/Simpson
Raise NRA to 68 by 2050 and 69 by 2075 Raise ERA to 63 by 2075 Restores 0.34% of taxable payroll or 15.3% of shortfall
Rivlin/Domenici Does not include an increase in the retirement age per se Indexes new benefits for longevity instead Replacement rate will be 99.7% of benefits the year before Restores 0.48% of taxable payroll or 21.6% of shortfall
June 2011 Consortium for Citizens with Disabilities
39
Impact on People with Disabilities
Benefit cut for workers with disabilities who work until they reach retirement age or who retire early
Benefit cut for people receiving family benefits from a retired worker
June 2011 Consortium for Citizens with Disabilities
41
Impact on People with Disabilities (continued)
No direct effect on people receiving benefits under disability program but: Disability applications already increasing due to
current law increase in retirement age Raising the ERA:
Leaves people with disabilities in their early 60s, but who do not meet the stringent requirements for Disability Insurance (DI) program, without Social Security insurance coverage
Will cause more workers to apply for DI benefits Will increase the administrative workload, processing time for
disability applications, and delay in benefit awards
June 2011 Consortium for Citizens with Disabilities
42
Proposal 3: Change the Cost of Living Adjustment Formula Current law provides for an annual Cost
of Living Adjustment or COLA for benefits under all programs
Helps protect the value of benefits against inflation
Current COLA is based on the change in the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Worker)
There was no COLA for 2010 or 2011
June 2011 Consortium for Citizens with Disabilities
43
Proposal 3: Cost of Living Adjustment Formula (cont)
Reform proponents argue that the current measure overstates inflation
Propose to change to another measure known as the “chained CPI” Generally finds a smaller increase in the cost of
living year to year Bases its rate on “substitution effect”
When prices on a particular item go up, people will substitute other less expensive items in their place (e.g. if steak prices rise, a person will buy hamburger instead)
June 2011 Consortium for Citizens with Disabilities
44
Proposal Specifics Bowles/Simpson
Change to “Chained CPI” Restores 0.50% taxable payroll or
22% of shortfall Rivlin/Domenici
Change to “Chained CPI” Restores 0.49% taxable payroll or
22% of shortfall
June 2011 Consortium for Citizens with Disabilities
45
Why the Chained CPI Is Not More Accurate
More applicable to higher income earners Can’t substitute hamburger for steak if already
only eating hamburger or no meat Not applicable to many seniors or people
with disabilities Majority of expenses are to meet basic needs
Underestimates expenses like medical care on which people with disabilities and seniors spend a larger percentage of their income
June 2011 Consortium for Citizens with Disabilities
46
Impact on People with Disabilities
Change in COLA will result in a benefit cut for all people receiving benefits under all Social Security programs
Effect is cumulative The longer a person receives benefits the greater the
benefit cut will be People receiving disability benefits tend to receive
benefits longer than people who receive benefits under other programs
Value of benefits no longer adequately protected from inflation
June 2011 Consortium for Citizens with Disabilities
47
Proposals to Address Long-Term Solvency:
Revenue Enhancements
June 2011Consortium for Citizens with
Disabilities48
Current Revenue Design Almost every worker pays in – some state
and local workers do not Current FICA Tax Rate: 12.4% of earnings
6.2% paid by employee 6.2% paid by employer
Earnings taxed are capped at $106,800 – adjusted annually
Only earnings in the form of wages are taxed – dividends and capital gains are not
June 2011 Consortium for Citizens with Disabilities
49
Interest Revenue Two sources of revenue to the
Social Security Trust Funds: FICA Taxes Interest earned on money in Trust
Funds Trust Funds invested in U.S.
Treasury bonds Steady return with no risk
May 2011Consortium for Citizens with
Disabilities 50
Proposal 1: Raise or eliminate the cap on earnings Historically, 90% of total earnings
have been taxed Currently, only about 83% of
earnings taxed Lower percentage due in large part to
earnings cap amount increases lagging behind growth in income of high earners
June 2011 Consortium for Citizens with Disabilities 51
Proposal Specifics Phase in increase in cap to capture
90% of wages Bowles/Simpson – by 2050
Restores 0.67% of payroll or 30.2% of shortfall Rivlin/Domenici – over 38 years
Restores 0.60% of payroll or 27% of shortfall
June 2011 Consortium for Citizens with Disabilities 52
Proposal Specifics (continued) Eliminate cap on employers and
keep cap for employees the same Rep. Schakowsky – 74% of shortfall
eliminated based on 2010 Trustees Report (not provided as percent of payroll)
June 2011 Consortium for Citizens with Disabilities
53
Proposal 2: Increase FICA Rates
Current Rate: 12.4% (6.2% employee; 6.2% employer)
Immediately increase by 1.1% on each – 7.3% each Restores 2.09% of payroll or 94.1% of shortfall
Medium earner with $43,451 annual earnings – increase of $478 a year or $9.19/week
Not included in any current proposalJune 2011 Consortium for Citizens with
Disabilities 54
Proposal 2: Increase FICA Rates (continued)
Gradually increase by 1% over 20 years starting in 2015– 7.2% each by 2035 Restores 1.39% of taxable payroll or 63% of
shortfall Average earner in 2015 with $53,085
annual earnings – increase of $26.50 a year or $.50/week
Not included in any current proposalJune 2011 Consortium for Citizens with
Disabilities 55
Proposal 3: Require Uncovered Workers to Contribute Almost all U.S. workers pay into the
Social Security system Currently 8 states have more than half
their state and local workers not covered by the Social Security system and who don’t pay FICA contributions
Are covered by public pensions instead
June 2011 Consortium for Citizens with Disabilities 56
Proposal Specifics Have all newly hired state and local
workers be covered and pay in Bowles/Simpson – by 2020
Restores 0.16% of payroll or 7.2% of shortfall Rivlin/Domenici – by 2020
Restores 0.16% of payroll or 7.2% of shortfall Note: in 75th year would be -.12% of payroll when
state and local workers begin to collect benefits
June 2011 Consortium for Citizens with Disabilities 57
Proposal 4: Eliminate tax free status of cafeteria
plans People currently pay FICA taxes on
401(k) contributions but not on flexible spending accounts Health Savings Account Dependent Care Savings Account Transit Savings Accounts
June 2011 Consortium for Citizens with Disabilities 58
Proposal Specifics Rep. Schakowsky - Require
employees and employers to pay FICA taxes on all flexible savings account contributions Restores 0.25% of payroll or 11.26%
of the shortfall
June 2011 Consortium for Citizens with Disabilities 59
Revenue Changes: Impact on People with Disabilities Workers with disabilities would have
less take home pay if: FICA rates for employees increased They have earnings above current
taxable maximums and the cap is raised No direct impact on people with
disabilities receiving benefits under any of the Social Security programs
June 2011 Consortium for Citizens with Disabilities
60
June 2011Consortium for Citizens with
Disabilities 61
Principles for Achieving Long-Term Solvency of
the Social Security Programs
General Principles Social Security is NOT in crisis Social Security changes should not be included in
deficit reduction legislation The Social Security programs should not be
included in proposals that cap overall federal spending
Modest premium contribution adjustments, rather than benefit cuts, should be used to address long-term solvency of the Social Security programs
June 2011 Consortium for Citizens with Disabilities
62
June 2011Consortium for Citizens with
Disabilities 63
Principles (continued)
Do not change basic design based on payroll taxes
Preserve as social insurance for disability, survivors & retirement
Guarantee monthly benefits adjusted for inflation
Preserve current & future benefits Restore program’s long term funding
For More Information
To find fact sheets regarding Social Security and disability, links to helpful resources, or to access a recording of this webinar, please visit
www.disabilityandsocialsecurity.org
June 2011Consortium for Citizens with
Disabilities 64