Would you believe that President Donald Trump is eligible for an extra Social Security benefit of around $15,000 a year because of his 11-year-old son, Barron Trump? Well, you should believe it, because it’s true.
How can this be? Because under Social Security’s rules, anyone like Trump who is old enough to get retirement benefits and still has a child under 18 can get this supplement — without having paid an extra dime in Social Security taxes for it.
The White House declined to tell us whether Trump is taking Social Security benefits, which by our estimate would range from about $47,100 a year (including the Barron bucks) if he began taking them at age 66, to $58,300 if he began at 70, the age at which benefits reach their maximum.
Of course, if Trump, 71, had released his income tax returns the way his predecessors since Richard Nixon did, we would know if he’s taking Social Security and how much he’s getting. There’s no reason, however, to think that he isn’t taking the benefits to which he’s entitled.
Meanwhile, Trump’s new budget proposes to reduce items like food stamps and housing vouchers for low-income people. It doesn’t ask either the rich or the middle class to make sacrifices on the tax or spending side. And it doesn’t touch the extra Social Security benefit for which Trump and about 680,000 other people are eligible.
The average Social Security retiree receives about $16,900 in annual benefits. Does it strike you as bizarre that someone in Trump’s position gets a bonus benefit nearly equal to that?
Does it seem unfair that by contrast to Trump, most male workers — and for biological reasons, an even greater portion of female workers — can’t get child benefits because their kids are at least 18 and out of high school when the workers begin drawing Social Security retirement benefits in their 60s and 70s?
Trump is eligible for the Late-in-Life-Baby Bonus, as we’ve named it, because the people who designed Social Security decided in 1939, about five years into the program, that dependents and spouses needed extra support. They didn’t think much (if at all) about future expansion in the number of retirees, primarily male, who would have young kids.
The Late-in-Life-Baby Bonus goes to about 1.1 percent of Social Security retirees and costs about $5.5 billion a year. That’s a mere speck in Social Security’s $960 billion annual outlay.
Yet the Late-in-Life-Baby Bonus is a dramatic — and symbolic — example of hidden problems that plague Social Security, problems that few non-wonks recognize and that reform proposals have largely ignored.
Those problems are why the two of us — Allan Sloan, a journalist who has written about Social Security for years; and C. Eugene Steuerle, an economist who has written extensively about Social Security, co-founded the non-partisan Urban-Brookings Tax Policy Center and is the author of “Dead Men Ruling: How to Restore Fiscal Freedom and Rescue Our Future” — combined forces to write this article.
We want to show you how we can help Social Security start heading in the right direction before its trust fund is tapped out, at which point a crisis atmosphere will prevail and rational conversation will disappear.
Calling for Social Security fixes isn’t new, of course, but the calls usually focus primarily on fixing the increasing gap between the taxes Social Security collects and the benefits it pays.
For us, however, the Late-in-Life-Baby Bonus is an example of why reform should not only restore fiscal balance but should also make the system more equitable and efficient, more geared to modern needs and conditions, and more attuned to how providing ever-more years of benefits to future retirees puts at risk government programs that help them and their children during their working years.
If all that mattered were numbers, we could easily provide better protections against poverty with no loss in benefits for today’s retirees, while providing higher average benefits for future retirees. But that works only if the political will is there to update Social Security’s operations and benefit structure. After all, a system designed in the 1930s isn’t necessarily what we’ll need in the 2030s.
And make no mistake about how important Social Security is. Millions of retirees depend heavily on it. According to a recent Census working paper, about half of Social Security retirees receive at least half their income from Social Security — and about 18 percent get at least 90 percent of their income from it. Add in Medicare benefits, and retirees’ reliance on programs funded by the Social Security tax are even higher.
Given the virtual elimination of pension benefits for new private-sector employees and the increasing erosion in pensions for new public-sector employees, Social Security will likely be needed even more in the future than it is today.
Simply throwing more money at Social Security isn’t the way to solve its imbalances, much less deal with the Late-in-Life-Baby Bonus and some of the other bizarre things we’ll show you.
Money-tossing would just continue the pattern of recent decades that provides an ever increasing proportion of national income and government revenue to us when we’re old (largely through Social Security and Medicare), and an ever smaller proportion when we’re younger (anything from educational assistance to transportation spending). This shortchanges the workers of today and tomorrow who will be called upon to fork over taxes to cover the costs of Social Security and other government programs for their elders.
We began with the Late-in-Life-Baby Bonus because giving people like Trump — a wealthy man with a young child from a third marriage — an extra benefit unavailable to 99 percent of retirees is a dramatic example of how problems embedded in Social Security cause inequities and problems that few people other than Social Security experts know about.
Think that we’re overreacting to a minor quirk? We aren’t. Here are some additional aspects of Social Security that we think violate standards of equal justice and common sense:
There’s the Single Parent Shortchange, whereby many single parents — largely mothers with below-average earnings — pay Social Security taxes to cover spousal and survivor benefits for other people even though the solo parents can’t receive them. Sure, many people contribute toward benefits they will never see, especially if they die before retirement age. But the Single Shortchange strikes us as horribly unfair. Single parents are among the lowest income payers of Social Security taxes. Why should they subsidize other folks’ never-working spouses in a way that gives the biggest benefits to the best-off people?
Then there’s the Agatha Christie Benefit: Some divorced people get a bonus from Social Security only if their former spouse dies. And the Serial Spouse Bonus: If someone has had, say, three spouses, each might get the same full spousal and survivor benefits available to the one lifetime spouse of another worker — provided that each marriage lasted at least 10 years. If a marriage lasts nine years and 364 days, the spouse gets zippo.
The Equal Earner Penalty means that a couple with two people each earning $40,000 gets about $100,000 less in lifetime benefits than a couple with one spouse earning $80,000 and the other earning nothing. This happens even though both couples and their employers pay identical Social Security taxes.
Many if not most of these inequities would be illegal in private retirement plans.
Fixing the Late-in-Life-Baby Bonus and the other inequities we mentioned (as well as plenty that we omitted) is more about remedying injustice than cutting costs; giving some people more benefits and others less would pretty much offset each other.
The system needs to be overhauled not simply to become more fair by giving less to the Trumps of the world and more to the less fortunate among us, but because Social Security, created in the 1930s, was largely constructed around a world in which married women were expected to stay at home. People also had shorter lifespans then and retired later, so that today retirees receive benefits for 12 more years on average than retirees in the system’s earlier days.
Back in 1965, there were about four workers for every person drawing benefits. Currently the ratio is in the low threes. Now, the decline in birth rates is hitting with a bang as baby boomers retire en masse, with the ratio expected to fall to about 2.2 in 2035. Each baby boomer retirement leads to an increase in takers and a decrease in makers.
Not dealing with this decline in workers-to-beneficiaries — a good chunk of which is caused by Social Security treating people as young as 62 as “old” — has broad implications for the revenues available for all government services, not just Social Security, as well as for the growth rate of our economy.
Even as fewer workers support more retirees, the average value of Social Security retirement benefits continues to rise. Look at the increasing “present value” of Social Security benefits for a two-income 65-year-old couple earning the average wage each year and expecting to live for an average lifespan.
In 1960, such a couple needed to have on hand $269,000 (in 2015 dollars) in an interest-bearing account to cover the cost of their lifetime benefits. Today, it’s about $625,000. In 2030, it will be about $731,000. And in 2055, when a Millennial age 30 this year turns 67, the full retirement age under current law, the present value of scheduled benefits hits seven digits: $1,029,000. Include Medicare, and benefits are about $1 million for today’s couple, rising to $2 million for the millennial couple.
These benefit-value increases are caused by a combination of longer lives for retirees and Social Security formulas that increase benefits as wages rise.
These numbers matter because Social Security isn’t like an Individual Retirement Account or a pension plan that sets money aside for you today for use when you retire. It’s mainly an intergenerational transfer system: Today’s workers pay Social Security taxes to cover their parents, who previously paid to cover their parents, who paid to cover their parents. That’s the way the system has worked since its founding in 1935. Social Security taxes paid by current workers and their employers get sent to beneficiaries, not stashed somewhere awaiting current workers reaching retirement age.
The system does have a trust fund that in the early 1980s was about to run out of money. A crisis loomed. As a result, after a report by the Greenspan Commission, Congress in 1983 enacted reforms that included gradually raising the normal retirement age (but not the early retirement age) and subjecting some Social Security retirement benefits to federal income tax.
This led to temporary surpluses while baby boomers were in their peak earning years. But now that boomers are retiring rapidly, Social Security’s tax revenues are falling farther and farther behind benefits being paid out.
The trust fund is projected to run dry in about 15 years. Meanwhile, every year without reform adds to the share of the burden required of the young, who already are scheduled to have lower returns on their Social Security contributions than older workers.
Do you think that if someone offered millennials a choice, they would want to face huge student debt, declining government investment in their children and higher future taxes (which are inevitable as deficits mount) — in exchange for a more generous retirement than today’s retirees get? Or would they prefer a system that treats them and their children better when they’re younger?
We’re both way past millennial age — but we know which we would prefer.
Now, we’ll show you how we can tweak Social Security to address the problems we’ve discussed without cutting benefits for current retirees or denying future retirees average benefits higher than current retirees get.
It’s about math. Social Security pays out far more than would be required to provide well-above-poverty-level benefits to all elderly recipients. Future growth in the economy will help tax revenues and benefits rise, which would give us room to modify the payout formulas and deal with problems that this iconic program isn’t addressing.
Those problems include poverty and near-poverty for millions of retirees, particularly the very old. That problem is greater for people who retired at 62 rather than waiting for their full retirement age, a move that locks them into lower payments for the rest of their lifetimes.
How can we orient the system more progressively to the needs of modern society, provide a stronger base of protection for all workers, and slow the growth rate of benefits to bring the system into better balance? To shore up Social Security permanently, it’ll be necessary to slow down the overall growth in benefits, encourage more years of work and end the pattern of people having ever-longer retirements as lifespans increase and Social Security doesn’t adapt its rules. At some point, it will also require a revenue (i.e., tax) increase, too.
Here, in simplified form, are some suggestions for making Social Security more modern and more fair.
- Change the benefit structure. Reduce the level of benefits that retirees get in their 60s and early 70s but give them higher-than-now benefits in their mid-to-late 70s and beyond. That would shift resources to retirees’ elder years when they have greater needs, including a higher probability of having to pay for long-term care.
- Raise the minimum benefit. Have a strong minimum benefit for most elderly that’s indexed to wage growth, which typically exceeds inflation. This would raise benefits for one-third to one-half of the elderly in a way that will essentially remove them from poverty.
- Trim benefit growth for those at the top. Offset at least part of the cost of higher minimum benefits by paying the highest-paid recipients less in the future than they would get under the current formula. Slow the rise in benefits for future retirees with way-above-average lifetime earnings by indexing their benefits to inflation rather than to wage growth.
- Index the retirement age. Having people work for additional years helps pay for higher levels of both lifetime and annual benefits. So if people on average are living a year longer, they should have to work a year longer. Those additional income and Social Security taxes would help support both Social Security and national needs that are higher priority than paying additional retirement years. Gradually phase out the early-retirement age that leads many healthy couples to retire on Social Security for close to three decades for the spouse who lives longer.
- Make spousal and survivor benefits more fair. Modify these benefits so that they provide higher benefits for those with greater needs rather than giving the richest bonuses to the richest spouses even when they contributed less in taxes than lower-income spouses. Otherwise, use rules similar to what private pensions use, so that benefits are shared fairly for the time of marriage together.
And one final thing: Bye-bye Late-in-Life-Baby Bonus. Stop paying retirees extra for children under 18. Continue the young-child bonus for widows or widowers below retirement age, and for people on disability.
Eliminating that bonanza for older parents would be a symbolic first step. And who can say? Perhaps now that lots more people (including possibly Trump himself) know that the Late-in-Life-Baby Bonus exists, our leaders might just be embarrassed enough to realize that the sooner Social Security is adapted to modern needs and circumstances, the better.
If this results in starting to fix Social Security the right way, the Late-in-Life-Baby Bonus will have delivered a big-time bonus of its own. The beneficiaries would be our future retirees, our workers and our country as a whole.
A version of this post originally appeared on The Washington Post.
+What should the next president do to make Social Security more sustainable?
No one should assess Social Security policy in isolation. What is fair in Social Security must relate to what is fair for the national budget as a whole.
Congressional Budget Office projections indicate that by 2026 we’ll be 21 percent richer, and that tax revenues will rise at a slightly higher rate. That means we stand before an ocean of opportunity. But of the expected $850 billion in additional real revenues, about 150 percent (or about $1.3 trillion) is committed entirely to increasingly expensive payments to Social Security, health care and interest on the debt. And as a result of these commitments, almost anything that represents investment — in our children, infrastructure or the basic functions of government — takes it on the chin.
Even as revenues grow, the number of workers available to pay for Social Security benefits is falling rapidly, meaning that either benefits must be cut, taxes increased, or both. Every delay puts more of the cost on the young.
Social Security maintains a design built around an economy and family structure of the past. People aged 65 now live about six years longer and retire even earlier than they did in 1940 when the system first paid benefits. That means families like Clinton’s, Trump’s and mine will be getting hundreds of thousands of dollars more in lifetime benefits than they would have when the system was first created, while many future elderly will still be left in poverty.
So what must be done? Slow down and reorient the growth in benefits scheduled for future retirees. A typical couple retiring today gets more than $1 million in lifetime Social Security and Medicare benefits; millennials are unrealistically scheduled to get $2 million. That growth can be slowed without being stopped and shifted more toward those who are truly old with low- to moderate-incomes. While Social Security’s long-recognized shortfalls inevitably mean someone must pay, those with above-median incomes are the ones with the money.
Still, no Social Security benefits need to be cut for those currently retired. To do better for those elderly with median or lower lifetime incomes, we should raise minimum benefits and give credit for raising children. We should also fix absurd rules around spousal and survivor benefits and other sources of inequity.
The current system discourages work in late-middle age, something that is no longer easily affordable and which reduces economic growth, personal income and tax revenues. Congress should reduce Social Security’s natural disincentives for work both by adjusting the retirement age as we live longer and saving a larger share of lifetime benefits for later ages, when health needs rise and work is less possible. As lifespan increases, Social Security now promises a typical newly retired couple aged 62 an average of more than 28 years of benefits (today, one of them is likely to make it to 90 years of age). That’s more than enough; there are greater societal needs than the desire for more retirement years.
Finally, the tax issue. While some broadening of the Social Security tax base is possible, government needs to concentrate on raising revenue for high priorities apart from Social Security: our growing national debt, and vital investments such as education, infrastructure and support for working families. Campaigns are about giveaways, but true reform requires looking at what must be done and how, whether we want to or not.
Photo courtesy of The Social Security Administration, Public Domain.
By: C. Eugene Steuerle and Rudolph G. Penner
The nation must change how it makes budget decisions. Permanent entitlement and tax subsidy programs, particularly those that grow automatically, dominate federal spending. Their growth, often set in motion by lawmakers long since dead or retired, is not scrutinized with the same attention as the discretionary programs Congress must vote on each year to be maintained, as well as grow. The result? A predetermined, inflexible federal budget that does not reflect our country’s needs.
Social Security, Medicare, and Medicaid, the three largest entitlement programs, accounted for $1.9 trillion, or about half, of federal spending in 2015. More important, they will absorb more than all the increase in tax revenues our growing economy will provide over the next decade and beyond. This astounding growth, combined with political unwillingness to collect enough taxes to pay for current government spending, translates to accelerating increases in budget deficits and national debt.
Congress can take steps to draw more attention to long-term sustainability when making budget choices. One possible reason such growth remains unchecked is that much of the budget process currently focuses at most on total spending and revenues over the next 10 years. This leads to game-playing when policymakers decide to increase government largess: Costs can be hidden outside the budget window, or costly “pay-fors” can be postponed for a later Congress to deal with.
Reforms focused on a 10-year window are similarly myopic and inadequate. To protect existing beneficiaries when enacting reform, typically only a small portion of the deficit reduction shows up in the first decade; the most impact is made on future beneficiaries, not current ones. A longer time horizon also makes reforms more palatable politically; it shifts the focus from threatening today’s retirees to allowing younger households to garner greater resources during their working years in exchange for less relative growth in government retirement benefits.
Better presentations of the budget priorities set by the president and Congress is crucial for reform. Current budget documents do not give a very clear picture of how much growth in spending is predetermined versus newly legislated. Nor do they reflect the relationship among real growth in taxes, tax subsidies, and spending programs.
What would such an improved portrayal show? Near-term problems in how our money is spent, not just long-term ones related to growing debt. Today’s current law, as estimated by the Congressional Budget Office, implies $1.281 trillion more inflation-adjusted dollars will be spent in 2026 than in 2016: $845 billion from revenue increases and $436 billion from deficit increases. Of these dollars, 33 percent will be devoted to Social Security and 37 percent to health programs, mostly Medicare and Medicaid. A further 27 percent will be devoted to larger interest costs related to debt increases.
What does this leave for everything else? Essentially nothing. About 1 percent of the $1.281 trillion would be spent for defense and 4 percent for other mandatory spending, most of which is for non-health entitlements. Domestic programs that must be funded every year will be cut slightly in real dollars while declining substantially as a share of national income. Only much larger deficits at an unsustainable level prevent further hits on these programs.
Entitlements should be reviewed more frequently, and periodic votes of Congress should determine most of their growth. Permanent tax subsidies need similar scrutiny and limits placed on their automatic growth. In good times, tax rates must be high enough to avoid pushing today’s costs onto tomorrow.
Automatic triggers that activate if economic and demographic developments turn out worse than expected are one way to slow benefit growth or increase revenues. Sweden, Canada, Japan, and Germany use triggers in their Social Security programs; U.S. policymakers can learn from them. Of course, triggers work best when they reinforce sustainable programs. If required adjustments are too politically painful, Congress will simply override them, as it did for many years with updates to physician payment rates in Medicare.
We must grant future voters and those they elect more flexibility to allocate budget resources. Improving the way Congress budgets can enable government to better respond to changing needs, set new national priorities, and get off a disastrous fiscal path.
— C. Eugene Steuerle is an Institute fellow and the Richard B. Fisher chair at the Urban Institute. Rudolph G. Penner is an Institute fellow at the Urban Institute. They are the coauthors of “Options to Restore More Discretion to the Federal Budget,” a joint publication by the Mercatus Center at George Mason University and the Urban Institute.
A version of this post originally appeared on Economics21.
Photo by 401(K) 2012 via Flickr Creative Commons.
Without fanfare, a bipartisan group of Representatives has introduced a bill that could bring Social Security’s finances close to long-term balance. Labeled the “Save Our Social Security Act of 2016,” the proposal also recognizes an important fact: that the longer we delay reform, the more it will cost post-babyboom generations.
Gen X and Y and Millennials are already scheduled to pay more for their benefits than boomers and older generations no matter what path we take to reform. Whether we raise payroll taxes, use more income taxes to pay off Social Security obligations, or cut benefits, someone must pay. Delaying reform only increases the burden on the young.
The “SOS Act,” as it is called, was introduced by five Republicans and one Democratic member of the House. Co-sponsors Reid Ribble (R–WI) and Dan Benishek (R–MI) were joined by Jim Cooper (D–TN), Cynthia Lummis (R–WY), Scott Rigell (R–VA), and Todd Rokita (R–IN). They pieced together the proposal using an interactive tool offered by the Committee for a Responsible Federal Budget. (Disclosure: I serve on the committee’s board of directors).
The bill contains these primary features (listed in order of their ability to shrink Social Security deficits; the last two would raise deficits):
- Increase the “normal retirement age” (NRA) by two months per year until it reaches 69 for those turning 62 in 2034. Thereafter, it indexes the NRA to increases in longevity, so that the fraction of a lifetime spent in retirement stops growing.
- Levy the OASDI tax on 90% of covered earnings.
- Use a more accurate measure of inflation to determine Social Security’s cost-of-living adjustment (COLA), so that benefits fall by about one-third of one percent per year.
- When calculating average Social Security earnings, count a few more years than the 35 top-earning years, thereby creating a more accurate (and usually lower) measure of the share of a worker’s average lifetime earnings that will be replaced under the Social Security benefit formula.
- Under Social Security’s current design, the first dollars of average lifetime earnings are replaced at a 90% rate, the next dollars at a 32% rate, and the last dollars at a 15% rate; under the new proposal, the 15% rate would drop to 5% for those in that top earnings bracket.
- Raise annual benefits by roughly $1,000 a year for those with more than 20 years of coverage, and let that amount grow at the average wage growth rate.
- Set a special minimum benefit so that, for instance, workers with 20 years of coverage would receive a benefit no lower than the poverty level, and increase the minimum benefit by the average wage growth rate instead of the inflation rate.
These changes would bring the Social Security system close to long-term solvency. Enough taxes would accrue to pay full benefits not only for 75 years, but also to roughly cover benefits in the 75th and later years. By contrast, the last major reform (in 1983) didn’t close the long-term gap.
Almost as soon as that Reagan-era bill was passed and signed, its failure to cover the period after 75 years led Social Security actuaries to declare the system’s finances out of balance. The solvency issue would pop up again under subsequent presidents. The SOS Act, however, would restore balance, and do so equitably: by closing one-third of the funding gap through tax increases, one-third through progressive rate changes, and one-third through adjustments in the retirement age.
The bill can still be improved. It could do more, at a fairly moderate cost, to help those with below-median lifetime incomes. (As a member of the bipartisan 1999 National Commission on Retirement Policy, I was among the first to propose higher minimum benefits as a way to address distributional issues and improve benefits for low and moderate-income elderly.) The bill could also address the structure of survivor and spousal benefits, which is built on the notion of a stereotypical mid-20th century household with a male breadwinner and a stay-at-home wife. It could also address the negative economic consequences of keeping the early retirement age at 62 no matter how long people live.
For those who are interested, Social Security’s assessment of the bill’s consequences is helpful to read but it can also be misleading. The assessment implies that future retirees’ income replacement rates will fall relative to those of current retirees. That’s true only if Americans keep retiring as early as they currently do. In fact, many people (except those with the highest incomes) could enjoy an increase in replacement rates simply by working an additional year for every year the average life expectancy improves.
A version of this post originally appeared on the Retirement Income Journal.
The budget compromise forged by Congress and the Obama administration at the end of last month makes two fundamental changes in Social Security. First, it denies a worker the opportunity to take a spousal benefit and simultaneously delay his or her own worker benefit. Second, it stops the “file and suspend” technique, where a worker files for retirement benefits then suspends them in order to generate a spousal benefit.
Unfortunately, neither of these changes gets to the root issue: that spousal and survivor benefits are unfair, although the reform redefines who wins and who loses. Social Security spousal and survivor benefits are so peculiarly designed that they would be judged illegal and discriminatory if private pension or retirement plans tried to implement them. They violate the simple notion of equal justice under the law. And as far as the benefits are meant to adequately support spouses and dependents in retirement, they are badly and regressively targeted.
As designed, spousal and survivor benefits are “free” add-ons: a worker pays no additional taxes for them. Imagine you and I earn the same salary and have the same life expectancy, but I have a non-working spouse and you are unmarried. We pay the same Social Security taxes, but while I am alive and retired, my family’s annual benefits will be 50 percent higher than yours because of my non-working spouse’s benefits. If I die first, she’ll get years of my full worker benefit as survivor benefits.
Today, spousal and survivor benefits are often worth hundreds of thousands of dollars for the non-working spouse. If both spouses work, on the other hand, the add-on is reduced by any benefit the second worker earns in his or her own right.
An historical artifact, spousal and survivor benefits were based on the notion that the stereotypical woman staying home and taking care of children needed additional support. That stereotype was never very accurate. And today a much larger share of the population, including those with children, is single or divorced. Plus, many people have been married more than once, and most married couples have two earners who pay Social Security taxes.
Where does the money for spousal and survivor benefits come from? In the private sector, a worker pays for survivor or spousal benefits by taking an actuarially fair reduction in his or her own benefit. In the Social Security system, single individuals and married couples with roughly equal earnings pay the most:
- Single people and individuals who have not been married for 10 years to any one person pay for spousal and survivor benefits, but don’t get them. This group includes many single heads of households raising children.
- Couples with roughly equal earnings usually gain little or nothing from spousal and survivor benefits. Their worker benefit is higher than any spousal benefit, and their survivor benefit is roughly the same as their worker benefit.
The vast majority of couples with unequal earnings fall between the big winners and big losers.
Such a system causes innumerable inequities:
- A poor or middle-income single head of household raising children will pay tens of thousands of dollars more in taxes and often receive tens of thousands of dollars fewer in benefits than a high-income spouse who doesn’t work, doesn’t pay taxes and doesn’t raise children.
- A one-worker couple earning $80,000 annually gets tens of thousands of dollars more in expected benefits than a two-worker couple with each spouse earning $40,000, even though the two-worker couple pays the same amount of taxes and typically has higher work expenses.
- A person divorcing after nine years and 11 months of marriage gets no spousal or survivor benefits, while one divorcing at 10 years and one month gets the same full benefit as one divorcing after 40 years.
- In many European countries that created benefit systems around the same stereotypical stay-at-home woman, the spousal benefits are more equal among classes. In the United States, spouses who marry the richest workers get the most.
- One worker can generate multiple spousal and survivor benefits through several marriages, yet not pay a dime extra.
- Because of the lack of fair actuarial adjustment by age, a man with a much younger wife will receive much higher family benefits than one with a wife roughly the same age as him.
When Social Security reform eliminated the earnings test in 2000 and provided a delayed retirement credit after the normal retirement age, some couples figured out ways to get some extra spousal benefits (and sometimes child benefits) for a few years. After the normal retirement age (today, age 66), they weren’t “deemed” to apply for worker and spousal benefits at the same time, allowing them to build up retirement credits even while receiving spousal benefits. Other couples, through “file and suspend,” got spousal benefits for a few years while neither spouse received worker benefits.
These games were played by a select few, although the numbers were increasing. Social Security personnel almost never alerted people to these opportunities and often led them to make disadvantageous choices. Over the years, I’ve met many highly educated people who are totally surprised by this structure. Larry Kotlikoff, in particular, has formally provided advice through multiple venues.
So is tightening the screws on one leak among many fair? It penalizes both those who already have unfairly high benefits and those who get less than a fair share. It reduces the reward for game playing, but like all transitions, it penalizes those who laid out retirement plans based on this game being available. It cuts back only modestly and haphazardly on the long-term deficit. As for the single parents raising children — perhaps the most sympathetic group in this whole affair — they got no free spousal and survivor benefits before, and they get none after.
The right way to reform this part of Social Security would be to first design spousal and survivor benefits in an actuarially fair way. Then, we need better target any additional redistributions on those with lower incomes or higher needs in retirement, through minimum benefits and other adjustments that would apply to all workers, whether single or married, not just to spouses and survivors.
As long as we keep reforming Social Security ad hoc, we can expect these benefit inequities to continue. I fear that the much larger reform required to restore some long-term sustainability to the system will simply consolidate a bunch of ad hoc reforms and maintain these inequities for generations.
This column originally appeared on PBS Newshour’s Making Sen$e.
When America’s Social Security system was first established in 1935, the public was deeply concerned about the fate of our elderly, who were then on average poorer than the rest of the population, less capable of working, more likely to work in physically demanding jobs, and less likely to live close to two decades past age 65. Today’s concept of Social Security was actually only one part of an act aimed at meeting the needs of the poor, old, needy, and unemployed of all ages.
In the early decades through the 1960s, Congress expanded old-age supports largely to cover important gaps such as spouses and survivors, disability, health insurance and inflationary erosion of benefits. Today, however, Social Security grows based on past laws that preordain increases in old-age support, largely independent of how the needs of the elderly and nonelderly have evolved or will evolve.
In a newly released study, Caleb Quakenbush and I find that a typical couple retiring today is scheduled to receive about $1 million in cash and health benefits; many millennials will receive $2 million or more. In effect, we’ve now scheduled many young adults to be future Social Security and Medicare bi-millionaires. And the growth continues; the succeeding generation, born early in the 21st century and sometimes referred to as the homeland generation or generation Z, is scheduled for significantly higher benefits. Add to these amounts additional Medicaid expenditures that also go to many elderly if in a nursing home for any extended period of time. (These figures are “discounted”—that is, they show what amount would be required in a saving account, at age 65, earning real interest, to provide an equivalent level of support.)
In fact, a very high proportion of all growth in federal government spending over the next several decades is currently scheduled for Social Security and Medicare. Almost all other spending, whether for children or defense, infrastructure, or the basic functions of government, already is held constant or in decline in absolute terms, and sometimes in a tailspin relative to the size of the economy and the federal government. Only other forms of health care and retirement support, interest costs, and tax subsidies are on the rise.
Such developments are hardly sustainable. Simple math tells us that they will continue to impose costs that the millennials and younger generations are already experiencing: cuts in other benefits for them and their children, higher taxes, and reduced government services when they are in school, working, or middle-aged.
Next time you read a headline on growth in student debt, the falling real value of the child credit, declines in federal spending on education and infrastructure support, or fewer soldiers and sailors, keep in mind that these stories all follow as a consequence of where past Congresses have directed almost all government growth. Of course, governments almost always spend more as an economy and the tax base expand, whether the size of government relative to the economy grows, stays constant, or declines. But past governments traditionally allowed future legislators and voters to choose what to do with those additional revenues; they weren’t stuck with leaving that decision to prior legislators.
How did we get here? As Congresses and presidents added to Social Security over the years, it became more generous. Health insurance was expanded to cover hospitals and doctors, then more recently under President George W. Bush, drug benefits. Cash benefits were raised through various enactments under Republican and Democratic presidents alike.
One big culprit is the retirement age, which, by remaining stable on the basis of chronological age, does not remain stable on the basis of years of support, which increase as people live longer. A typical couple retiring at the earliest retirement age now receives benefits for close to three decades, which is roughly the expected lifespan of the longer living of the two. Spend $25,000 (discounted) per year on each person, but then do it for 20 years or so per person, and you come up with a figure like $1 million for a couple.
Since the 1970s, real annual benefits have also been growing automatically as wages rise. In fact, the combination of “wage indexing” and failure to adjust for life expectancy schedules Social Security to rise forever faster than the economy.
Then, of course, there are the health care costs. People are getting more years of medical support as they live longer. Plus, the federal government has never effectively tackled the increasing costs that result almost inevitably in a system where you and I can bargain with our doctors over whatever everybody else should pay to support our next procedure or drug.
By the way, none of these calculations account for the decline in the birth rate and its effect on the number of workers available to support such benefit growth. Roughly speaking, the taxes available to support any system decline by about one-third when the ratio of workers to retirees falls from 3:1 to 2:1.
We’ve traveled a long distance from 1935’s legislation and its goal of addressing the needs of people of all ages.
What happens when the claim to some financial right from the government creates some financial “wrong” somewhere else?
That is, when the government’s balance sheets don’t balance, and there aren’t enough assets to pay for claims on them, someone must get short-changed. If that “someone” must accept unequal treatment under the law, has the right been matched by a “wrong?” These issues have now arisen for underfunded state pension plans, but they continue to apply in other arenas, such as the unequal assessment of property taxes in states like California. In these and other cases, the young often end up paying the piper.
Protecting rights has long been crucial to maintaining a democratic order. The United States has a long history of protecting citizens’ rights, embedded from the beginning of the nation in the Bill of Rights and, since then, in many legal and constitutional clauses. These aim largely to establish liberty and require equal treatment under the law. When it comes more narrowly to most disputes over private property and assets, there are no “unfunded” government promises; contestants simply dispute over who gets the private funds. The court effectively fills out the balance sheet when it resolves those private disputes. A higher inheritance to one party out of a known amount of estate assets, for example, means a lower amount for another. There’s no third party or unidentified taxpayer who must to contribute or add to the estate so all potential inheritors can walk away happy.
When it comes to financial “rights” established by law, the issue becomes more complicated. The latest cases getting much attention revolve around the rights of state and local public employees to the benefits promised by their pension plans, even when those plans do not have the assets to cover the claims. Some courts have determined that the promised benefits are inviolable under state constitutions, regardless of available assets; other courts have recently interpreted state laws differently, led by the bankruptcy and financial distress of state pension plans.
As another example, some states give longer-term homeowners rights to lower taxation rates than newer homeowners. Proposition 13 of the California Constitution requires that property taxes cannot be increased by more than a certain rate, effectively granting existing homeowners lower tax rates than new homeowners receiving the same services for their tax dollars.
So where does the money come from? Saying that it can be the future taxpayer still dodges the issue of whether the allocation of benefits and costs meets a standard of equal justice.
Thus, when people lay claim to nonexistent government assets, “rights” can’t be totally separated from the “accounting” system under which they are assessed. I’m not a lawyer, but I believe courts and legislators do not do their job completely if they don’t admit to and address the following questions in any disputes on such matters:
- How can we judge anyone’s right to some financial compensation, pension benefit, or lower tax rate without at least knowing where and how the balance sheet is or might be filled out?
- How does the claim to a right by one set of citizens affect the rights of other citizens?
Even when courts determine that any resulting injustice is constitutional or the prerogative of the legislature, they still should do their balance-sheet homework.
In some arenas, the courts have made clear that the lack of underlying funds limits the rights of people to some promised benefit. The United States Supreme Court has stated, for instance, that Social Security benefits can be changed regardless of past legislative promises. This system is largely pay-as-you-go: benefits for the elderly come almost entirely from the taxes of the nonelderly. Because promised cash benefits now increasingly exceed taxes scheduled to be collected, even the pay-as-you-go balance sheet has not been filled out: some past Congress promised that benefits would grow over time without figuring out who would pay for that growth. Legislators can rebalance those sheets constitutionally without violating the rights of a current or future beneficiary. Whether they do so fairly is another matter.
When the courts have leaned toward treating as unalterable the rights of some citizens to unfunded promises made in the past, however, they have directly or indirectly required some unequal treatment under the law, with the young often paying the piper.
Our Urban Institute study of pension reforms in many states reveals that efforts to protect existing but not new state pensions almost always requires the young to receive significantly lower rates of total compensation than older workers doing the same work. Worse yet, we have determined that to cover unfunded liabilities from the past, some states are adopting pension plans that grant NEGATIVE employer pension or retirement plan benefits to new workers, essentially by requiring them to contribute more to the plan than most can expect to get back in future benefits.
In the case of California’s limited property tax increases, new, younger homeowners are required to pay much higher taxes than wealthier, older, and longer-term homeowners.
In these cases, it seems fairly clear that the “rights” of existing state workers or homeowners leads to an assessment of “wrongs”—unequal taxation of unequal pay for equal work—on others, mainly the young, to fill out the balance sheets.
As I say, I’m not a lawyer, but I do know that 2 + 2 does not equal 3. When the courts say that you are entitled to $2 and I’m entitled to $2, they can eventually defy the laws of mathematics if only $3 is available. It’s not that the declining availability of pension benefits to many workers and rapidly rising taxes are problems to be ignored. It’s just that assessing wrongs or liabilities on unrelated parties to a dispute is unlikely to represent equal justice under the law or an efficient way to resolve public finance issues.
This morning, I testified before the House Ways and Means subcommittee on Social Security. Below is a lightly edited transcript of my spoken remarks. A full copy of my written testimony can be found here.
Contrary to the popular argument that we live in an age of austerity, we live in an age of extraordinary opportunity. Yet, as I argue in a new book, Dead Men Ruling, we block progress by refighting yesterday’s battles and trying to control too much an uncertain future. As one reflection, in 2009 every dollar of revenue had been committed before that Congress walked in the doors of the Capitol.
Looking to Social Security, after three quarters of a century of continual growth, it has largely succeeded in providing basic protections to most, though not all, older people. Now, as psychologist Laura Carstensen at the Stanford Center on Longevity suggests, we should be redesigning our institutions around the new possibilities that improved healthcare, reduced physical demands, and long lives provide. But the eternal automatic growth of Social Security is not conditioned on any assessment of society’s opportunities or needs. Not making best use of the talents of people of all ages. Not child poverty or educational failures or the incidence of Alzheimer’s or autism.
Let me focus on three problems caused by this past, rather than future, focus:
Social Security redistributes in many ways, both progressive and regressive. And in many ways, it fails to provide equal justice.
Among the most outrageous, working single parents, often abandoned mothers, are forced to pay for spousal and survivor benefits they cannot receive, often receiving at least $100,000 fewer lifetime benefits than some who don’t work, pay less Social Security tax, and raise no children.
Similarly, the system discriminates against two-earner couples, spouses who divorce before ten years of marriage, long-term workers, and those who beget or bear children before age 40.
Middle Age Retirement
People today retire for about a decade longer than they did when Social Security first started paying benefits. The biggest winners of this multi-decade policy have been people like the witnesses at this table and members of Congress, who, if married, now get at least $300,000 in additional lifetime benefits.
But there are other consequences: a decline in employment, the rate of growth of GDP and personal income, as well as lower Social Security benefits for the truly old.
Meanwhile, within a couple of decades, close to one-third of the adult population will be on Social Security for one-third or more of their adult lives. There is no financial system, public or private, that can provide so many years of retirement for such a large share of the population without severe repercussions for individuals’ well-being in retirement and the workers upon whose backs the system relies.
The Impact on the Young
Today, lifetime Social Security and Medicare benefits approximate $1 million for a couple with average incomes throughout their working lives, Rising by about $18,000 a year, benefits for a couple in 2030 a couple are scheduled to grow to about $1 1/3 million.
Meanwhile, the rate of return on contributions falls continually for each generation. Each year of delayed reform shifts more burdens to younger generations from older ones, with the largest impact on groups like blacks and Hispanics, in part because they comprise a larger share of those future generations with lower returns.
In summary, each year of delay in reforming Social Security:
- Continues a pattern of unequal justice under the law;
- Threatens the well-being of the truly old;
- Increases the share of benefits paid to the middle aged;
- Leads government to spend ever less on education and other investments;
- Contributes to higher nonemployment, lower personal income and revenues; and
- Increases the burden that is shifted to the young and to people of color.