Struggling workers need more help from Social Security.
Many older workers struggle financially as they approach retirement. They often have little saved to supplement their Social Security benefits. Worse, many of those who have few savings also face obstacles in finding good jobs at older ages or they deal with declining health that makes it difficult to keep working. They then accept permanently reduced early Social Security retirement benefits because they have little saved elsewhere and because they can no longer work. Now, there are a few novel ideas including my own co-authored one to help these older workers.
The National Academy of Social Insurance in collaboration with AARP conducted a Social Security Innovations Challenge in 2019. The goal was to identify proposals that either individually or in combination would address the challenges that older workers face who can no longer work due to health or labor market reason. The four selected proposals include better information for savers, well-targeted savings incentives, novel savings options, easier access to Social Security benefits and added Social Security benefits, both at the federal and at the state level. These proposals provide a menu of options that policymakers should consider to help struggling older workers.
My co-authors, Rebecca Vallas and Stephanie Lessing, and I propose a new Social Security bridge benefit in combination with meaningful tax reform. Our bridge benefit would increase Social Security benefits immediately for workers, who can no longer work. And our proposed tax reform would make it easier for lower-income workers to save for their retirement than the current inefficient savings incentives do. It would also free federal money to pay for the new Social Security benefit. Older workers would thus receive a substantial boost in their financial security relative to the current system without burdening the existing Social Security system.
We first propose a new, targeted Social Security benefit. Workers that start collecting Social Security benefits before the full retirement age because they cannot find work or because they face severe health issues would get better benefits. Their benefits would go up each year until they receive their full retirement benefit at the full retirement age, currently going up to 67 years. This new benefit builds a bridge between early retirement and full retirement benefits, hence the term bridge benefit.
It may be easiest to explain this with an example. A worker may have to retire at age 62 because of her health, but she is not eligible for disability benefits. She would receive a monthly benefit of $1,000 if she waited until age 67 in our example. Alternatively, she could get a permanently reduced benefit of $700 each month starting at age 62. With our proposed new benefit, her monthly benefit would go to $850 from age 62 to age 63, $875 in the next year, $900 in the third year, $934 in the fourth year, $966 in the fifth year and eventually reach the full $1000 per month when she turns 67. Our bridge benefit thus is a meaningful increase in income security over the current system, reducing the chance of poverty and material hardship such as not being able to pay their rent.
We paired this new Social Security benefit with a proposal for meaningful tax reform to existing savings incentives. We propose to end the system of tax deductions and exclusions and replace them with refundable, progressive tax credits, while also cutting back on the total amount the federal government spends on savings incentives. Current savings incentives help especially high-income earners, while our proposal would particularly help lower-income earners. This reform would move the tax code from ineffective savings incentives for people, who don’t need more help to save, to effective ones for workers, who need the most help saving for their retirement. This tax reform would also free up money to pay for the new bridge benefit. Our new Social Security benefit would thus not add to the system’s financial shortfall over the long-term, while our savings incentive would boost private savings for vulnerable workers.
Our proposal is not the only way to help struggling workers. Elizabeth Bauer, an independent actuary, proposes greater flexibility in how and when struggling workers can claim early retirement benefits. Sarah Holmes Berk, an economist at the National Bureau of Economic Research, envisions better savings plans in addition to more and better information on longevity to help workers make well-informed retirement decisions. And, John Burbank, the director of the Economic Opportunity Institute, and his colleague Aaron Keating propose a state level Social Security program as an add-on to the current federal program. All of these three additional proposals are novel and thoughtful. All four proposals, including our own, are complementary with each other. Policymakers, who worry about struggling older workers on the edge, now have options to consider that could substantially improve these workers’ finances.