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Social Security - Is It Time For Reform?

Aired 8/4/11 on KPBS Midday Edition.

Many wonder if social security will be around when they're ready to retire - we look at whether it may be time to reform the program.

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Above: Social Security Card

Social Security - is it time for reform? Many wonder if the entitlement program will be around when they retire. Economic tough times and bad planning have many depending on social security checks as their only plan, instead of a backup to other retirement income. Should the retirement age be increased?

GUEST

Ben Templin, Associate Professor, Thomas Jefferson School of Law

Author: Social Security Reform: Should the Retirement Age Be Increased? (Oregon Law Review Vol. 89, 1179)

Read Transcript

This is a rush transcript created by a contractor for KPBS to improve accessibility for the deaf and hard-of-hearing. Please refer to the media file as the formal record of this interview. Opinions expressed by guests during interviews reflect the guest’s individual views and do not necessarily represent those of KPBS staff, members or its sponsors.

CAVANAUGH: I'm Maureen Cavanaugh. It's Thursday, August 4th. Coming up later this hour, social media is opening up a whole new way to travel. We'll get a report on how couch surfing and Air B&B are being used by San Diego travelers and hosts. And the weekend preview highlights the return of La Jolla's celebration of classical music, Summer Fest.

We begin with ideas on Social Security reform. As the debate over the debt ceiling went down to the wire, the prospect of late or decreased Social Security checks began making people very nervous. About 52 million Americans get Social Security, and that number is only expected to increase in coming years. Questions about the future of the Social Security fund and efforts to make changes to it usually get bogged down in partisan politics. Joining me today is a San Diego law professor who studied the issue and published a paper on social security. Benjamin Templin teaches law in the Thomas Jefferson school of law. His paper in the Oregon law review is called Social Security restroom: Should the retirement age be increased? Thank you for coming in.

TEMPLIN: It's great to be here.

CAVANAUGH: How many beneficiaries are in San Diego of Social Security? How does Social Security impact our local economy?

TEMPLIN: Just in the City of San Diego, there are about 100,000 beneficiaries for Social Security. And that brings in on a monthly basis, about a -- $105 million a month into the economy.

CAVANAUGH: Wow. Okay. So when you have reviewed the debt ceiling deal, and of course we went through all of that earlier in the week, about whether or not Social Security checks were going to go out and so forth. Do you expect fallout on the Social Security fund from the $2 trillion in cuts that's mandated in this debt ceiling deal?

TEMPLIN: The way they act is -- structured is a two step process. In the first step, the first amount being cut, Social Security is not affected by that. The super committee that's going to designate an additional $1.5 trillion if cuts, Social Security is definitely on the table. It is on the agenda. They are already talking about it. However, if that proposal, the proposal that they come up with is not passed pie Congress, then Social Security will not be affected, will not be subject to the across the board automatic cuts.

CAVANAUGH: I see. So it all depends on what this 12 member committee comes up with.

TEMPLIN: Right.

CAVANAUGH: We'll have to keep our eye on that. I'm sure many Social Security recipients will be as well. We have gotten so many conflicting ideas in the recent past about Social Security. Professor, is the Social Security fund in trouble in the near term?

TEMPLIN: This is very much a yes and no or perhaps a no and yes answer. The way to really understand this issue is to understand how Social Security benefits are financed. And what it is a pay-as-you-go system. In other words, the tax receipts on the payroll tax immediately go out to pay benefits. And when there is -- when the government collects more in the payroll tax then they have to pay -- then they're obligated too to pay out benefits, that goes into a trust fund. So since 1983, with the last time there was major reform of the Social Security act, we've been building a buffer, a sort of rainy day fund, if you will, called the Social Security trust fund. And that's entirely invested in special issue non-marketable U.S. government bonds by the full faith and credit of the United States government. However --

CAVANAUGH: Which we were talking a great deal about earlier this week.

TEMPLIN: So in any case, right now, tax -- what's happened, there are demographic shifts in the population. We all know about this. The baby boom generation. There are more potential beneficiaries than there are workers. In other words, the worker beneficiary ratio is dropping. We have fewer people paying into the system. So that's one way that the tax that immediately goes out to pay benefits has been reducing in addition. Because of rising unemployment, we've seen less revenue than expected coming in to pay out benefits.

CAVANAUGH: How long -- let me stop you. How long can this fund go without any reform?

TEMPLIN: Well, without any reform, it will be exhausted by 2036. But the interesting thing is last year we actually started collecting less in tax revenue than we're paying out in benefits. So we started tapping the fund last year. There was an expectation that we -- that the payroll tax would increase. And it didn't. It has not, and it will not. From this point forward, we're tapping into the interest on those bonds, which means the Treasury has to come up with some way to pay the Social Security administration to send out the checks.

CAVANAUGH: Because we're not taking in enough to pay as we go.

TEMPLIN: So is there an immediate crisis? From the perspective of the Treasury department, and the broader budget, yes, there is an immediate crisis because they have to pay out more than they expected to pay out. From the perspective of the Social Security fund itself, we're well financed for the short term. It's just whether or not the government is actually going to pay the interest on this point.

CAVANAUGH: There's another aspect to the research you've done, and that is that more and more people are depending on Social Security as their own plan for retirement income. What explains that?

TEMPLIN: Well, this is -- in perhaps the last decade or so, a lot of work has been done in behavior finance to understand how people behave with their own personal finances. And what searches have discovered is that people don't -- even though they might not know what the test thing to do is, that you should save 10% of your salary or contribute to your 401K or your IRA, even though they know they should be doing that, they don't do it. So as a result they get toward the end of their career, if you will and realize social -- that the only thing they really have is Social Security to rely on. For a very comfortable retirement, you should have about 70% of your last year's salary as retirement income. But Social Security on average is only going to pay out about 40 to 45% if that much.

CAVANAUGH: Is it perhaps because wages have gone down or the value of people's property has gone down or their investments went south that -- are those factors also?

TEMPLIN: All of those things as well. We shouldn't just blame it on the behavior of people. These economic times have made it rough for a lot of people, and may be -- the statistics show that people who had planned to retire at 62, the first possible age to start receiving Social Security benefits, that they're planning to delay. And that's actually a good thing.

CAVANAUGH: That's the heart, I think of what you've -- you do in your report, in your published report in the Oregon law review. It's about the retirement age. How much of an influence could that be on efforts to fix the Social Security system? If people just began to retire a little bit later?

TEMPLIN: Well, it would certainly -- if the behavior is that people just retire later, then the effect on the Social Security system as -- in that we don't revise the system itself, there's no system itself. From actuarial basis, it doesn't matter whether you retire earlier rather than later. It but let me get to the larger question. If we raise the retirement age, how will that help the trust fund? It depends on how we do it. And normally, if you raise it, right now the maximum age is 67. And it's different for different people, for people born in different ways. So fingerprints, someone retiring -- turning 62 right now, their maximum retirement age or their full retirement age, rather, is 66. So what does this mean? If they'll retire at 66, they will get their full benefits. But if they retire at 62, they get a fraction of those benefits. They're deducted about 25%. So if we raise the retirement age to, say, 68, then that same person for each year that you retire early, it's another five%, roughly. And I'm rounding here. If we raised it to 68 that same person would see a 35% reduction instead of the present day 25.

CAVANAUGH: I see what you're saying. So it's not just people retiring later. It's the entire system being changed so that the retirement age is later than it is now. I was surprised in reading some of the information that you sent to us, and that is the number of people who trial do retire at age 62.

TEMPLIN: Oh, by and far, most people are starting to claim benefits. And by the way, you can claim benefits and still keep your job, depending on how much you make, there might be a reduction in those benefits over time. When you reach your full retirement age, then you start getting the non-reduced amount. So it's a very complex formula that doesn't -- people don't immediately grasp. The best way to do it if you want to find out for yourself, go to the Social Security.gov website, and there's a calculator there for you to run through it, to see what your benefits would be at different ages.

CAVANAUGH: Joe is calling us from Oceanside.

NEW SPEAKER: My original question had to do with the%ages being withheld from people in Social Security. But I also wanted to talk a little bit about the effect of the retirement age and when people choose to retire, given the fact that a lot of people they think that there isn't going to be enough money. So I don't know which question you want to field first.

CAVANAUGH: Let's talk about the one where people might be hesitant about even the concept of retiring because they're leery about whether or not Social Security is going to be around.

TEMPLIN: Part of the equation here is that -- people are starting to claim benefits at 62 exactly for the reason that Maureen specified. They don't think they're going to get it, they want to get something out of the system now before it becomes insolvent. So there is a misconception about what insolvency actually is. In 2036, the trust fund will be expired. Does that mean no one will get a check after 2036? No, that's not what it means. It means you'll get about 75 to 77% of the benefit that you would have been entitled to at that point in time. Because remember, the pika tax, the payroll tax will still be coming in. And this is only the projections. If we do something about it. Then maybe we can avoid some of that pain that comes down in the future.

TEMPLIN: And the first part.

CAVANAUGH: And the first part of his question was about payroll contributions. Were we paying off of your salaries into Social Security for what we expect from Social Security?

TEMPLIN: If we expect it to be like a pension system. Right now, it's meant to be the safety net. If we expect it to be more like a pension and replace a higher%age of our salary, then the current 40 to 45 percent, then no, we're not paying enough. We probably need to pay in the area of 10% more. What's the contribution -- if you just look at your payroll check and look at the pika tax, you'll see your employer pays six% of your salary, and you put another 6.2 Sincerely yours but that's up to a certain range. It's only the first hundred and $6,800.

CAVANAUGH: The amount of work that has gone into this, professor, is just amazing. And it's all broken down, I want to tell even, in the paper in the Oregon law review titled Social Security reform: Should the retirement age be increased? And we're linking to that article on our website at KPBS.org if you want to take a look. I've been speaking with associate professor Benjamin Templin of the Thomas Jefferson school of law. And professor, thank you so much.

TEMPLIN: Thank you, Maureen.

Comments

Avatar for user 'jmckane'

jmckane | August 4, 2011 at 12:46 p.m. ― 3 years, 4 months ago

Your guest was not clear with his terminology. Filing to start collecting benefits is not related to being retired. One can continue to work and start collecting or reversely retire and delay collecting until ann older age. Also, I do believe that a birthday in 1949 as a full benefit age of 72. At least the chart the SSA sent me shows a higher benefit if I wait until 72 to start collecting. There are folks who specialize in crunching the numbers. Usually if one has little or no earned income, it is financially better to begin taking benefits as the earliest age.

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Avatar for user 'Ben_Templin'

Ben_Templin | August 4, 2011 at 2:45 p.m. ― 3 years, 4 months ago

You are right -- people who work in this area often throw out the word "retire" when we really should be using the term "claiming benefits."

During the program, we were talking about the trend for people to stop working at 62 and start claiming benefits – i.e. retire. The decision of whether to start claiming benefits really depends on a number of factors including life expectancy, other means of support, etc. Most people, however, would be better off if they stayed in the workforce and delayed claiming benefits until after their full retirement age.

That said, let me try to address the other issues you brought up. The whole system is fairly complex, so I will first define a few terms which are used by the Social Security Administration.

--"Early Eligibility Age" is the age at which you can first claim benefits -- i.e. 62 years old. If you claim at this age, you get reduced benefits. Someone who has a Full Retirement Age is 66 and starts claiming early at 62 will have a reduction of 25% in benefits. If you keep working then there is a further reduction using what is called the Retirement Earnings Test (RET). I don’t have room here to discuss it in detail, so instead I suggest you read the article, which is linked on this webpage. It discusses the pros and cons of the RET in more detail.

--"Full Retirement Age" (FRA) is the age at which you get full benefits. (In the past, this has been called the Normal Retirement Age.) A person's FRA differs according to when he was born. Someone born in 1949 has a Full Retirement Age of 66. If that person claims benefits at 66, he get what is sometimes called "full benefits." For our purposes, "full benefits" matches up with the term "Full Retirement Age" to convey the idea that it's the amount you get if you retire at your FRA.

What you are talking about is referred to as "Enhanced Benefits." If you do not claim benefits at your FRA or earlier, then the "Delayed Retirement Credit" will enhance the benefits of someone born in 1943 or later by 8% per year until age 70. The Delayed Retirement Credit stops at 70. However, if you keep working you will have an increase in benefits. By continuing to pay into the system, you may be adjusting what is called the Average Indexed Monthly Earnings (AIME), which is the basis for your benefit calculation. This is a fairly technical so if you want to read more about it, I suggest you go to this link: http://www.ssa.gov/oact/cola/Benefits.html
As you can see, the calculation and factors that go into a benefits determination are fairly complex. The decision of when to retire (or start claiming benefits and still work) also very much depends on the facts and circumstances of the individual.

Hope that helps.

Best regards,

Ben Templin

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