May 10, 2005

NEW WHITE HOUSE DOCUMENT SHOWS MANY LOW-INCOME BENEFICIARIES
WOULD FACE SOCIAL SECURITY BENEFIT CUTS UNDER PRESIDENT’S PLAN
by Jason Furman

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The President’s Social Security proposals have been widely reported as protecting benefits for the bottom 30 percent of the population, people earning less than $20,000 today.  A document that the White House gave reporters in a press briefing on May 4, however, contains charts showing the bottom 20 percent of beneficiaries losing benefits, on average, under its plan.[1]

As it turns out, the sliding-scale benefit reductions that the President has proposed protect the retirement benefits of the lowest 30 percent of wage-earners.  A substantial number of other low-income beneficiaries, however, would be subject to benefit reductions.  The affected low-income individuals are members of the following beneficiary categories:

It also may be noted that the White House document that show an average reduction of $528 in 2050 significantly understates the size of the reduction.  This understatement occurs for two reasons:

Three Examples of How Vulnerable Low-income Beneficiaries Would be Affected

  • Survivor benefits for families with young children.  An average earner (making about $35,000 annually) dies at age 40 in 2045, leaving behind his wife and two young children aged 4 and 7. Under the President’s plan, this family would get a benefit reduction of 16 percent, or $4,400 per year.  This family would get about $50,000 less in total over the course of its receipt of survivors benefits. a With only one surviving parent, the family could well be in the bottom fifth of the income distribution.
  • Benefits for elderly widows.  Two people are married:  an average-earning husband and a wife who made much less.  They retire together in 2045 and are subject to a 16 percent benefit reduction as a result of the sliding-scale provision, which reduces their benefits by nearly $5,000 annually.  They are not in the bottom 30 percent of beneficiaries.  The husband dies, however, and the spouse falls into low-income status.  She receives a reduced survivors benefit — 16 percent below the current scheduled survivors benefit.
  • Benefits for divorced spouses.  A woman is married for 30 years but then becomes divorced.  She spent much of this time raising her family, rather than in the paid workplace.  As a result, she has very low career earnings, and when she retires in 2045, she would be entitled to a relatively low Social Security benefit based on her own work history.  Instead, she receives a $13,000 annual benefit based on her ex-husband’s work history.b Because she is in the bottom 30 percent of career earnings, the sliding-scale benefit proposal would protect the benefit based on her own work history.  But this is irrelevant to her because she is not collecting benefits based on her own earnings record.  Instead, her benefit is reduced by about 25 percent, to about $10,000 a year.

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a The total benefit is expressed in present value terms.  This is the amount of money that, with interest, would equal the total survivor benefits this family would receive.

b Social Security rules allow women (or men) who have been married for more than ten years to choose between collecting a benefit based on their own earnings history or 50 percent of the benefit based on their spouse’s — or ex- spouse’s — work history.


End Notes:

[1] White House, “Interpreting the Benefit Estimates for the Pozen Provision,” May 2005.  For further analysis of this White House document, see Jason Furman, “White House Distortions Mask Social Security Benefit Reductions,” May 6, 2005.

[2] Social Security Administration, Annual Statistical Supplement, 2004, Table 5.F13.

[3] Ibid., Table 5.A1.4.