The Projected Effects of Social Security Benefit Increase Options for Older Beneficiaries

Summary

Many reform plans designed to return the Social Security program to long-term solvency also include a benefit increase targeted toward older beneficiaries. Policymakers use two core rationales for such targeted increases. First, older beneficiaries tend to be more economically vulnerable and reliant on the income Social Security provides.¹ Second, certain benefit reductions (such as changes to cost-of-living adjustments) can compound over time, and including a benefit increase for older retirees in a larger reform plan can ameliorate those reductions.

Generally, the benefit increase proposals provide slightly larger monthly benefits starting at around age 80, but can vary along multiple lines. This policy brief analyzes two options, and projects their respective effects. The two options vary in how the benefit increase is calculated:

• The Individual PIA plan provides an increase of 5 percent of the individual's primary insurance amount (PIA), which is the benefit an individual will receive based on lifetime earnings, if retirement benefits start at the normal retirement age.
• The Average PIA plan provides an increase of 5 percent of the average PIA for all retired workers, rather than an individual's own PIA.²

We analyze those two particular provisions because they appear in various publicly available reform plans.^{3, 4} Both 5 percent targets may appear identical when described only as “a 5 percent benefit increase,” but they can produce different outcomes for beneficiaries.

Our analysis focuses on beneficiaries aged 85 or older in 2030 and we express the results as percentage differences from scheduled benefits under current law. We do not project the relative costs of the proposals.⁵

The analysis is based on data from the Modeling Income in the Near Term model, version 6 (MINT6). MINT6 includes data for respondents to the 2001 and 2004 Surveys of Income and Program Participation (SIPP), matched to Social Security administrative records through 2009. For 2010 and later, MINT6 projects life events, earnings, and benefits for those respondents.⁶

Major Findings

• The Individual PIA plan would produce a larger median increase in monthly benefits. However, the Average PIA plan would provide more progressive benefit changes, with lower lifetime earners receiving higher proportional benefit increases.
• Poverty would decline by a small amount under both of the plans, but by a slightly larger percentage under the Average PIA plan.
• Although nearly all beneficiaries aged 85 or older would receive the targeted benefit increase provided by each plan, roughly 2 percent would not receive higher benefits. In general, that group would not receive higher benefits either because they are dually entitled beneficiaries, and the increase in their own worker benefit is offset by a decrease in their auxiliary benefit; or because they are auxiliary-only beneficiaries receiving benefits based on the earnings record of an individual who has not yet reached age 81.^{7, 8}

Comparing the Policy Options

Box 1 differentiates the 5 percent targets in the plans we model.

The other provisions of the two proposals are identical. The plans start in 2013, apply to beneficiaries starting at age 81, and phase up linearly to the full increase at age 85. We analyze effects for beneficiaries starting at age 85 rather than age 81 to provide a clearer picture of how the policies look when fully phased in. Table 1 presents the projected characteristics of the beneficiary population aged 85 or older in 2030.

Both plans increase benefits by raising the retired worker's PIA. This approach means that the benefit increase an individual receives each month may differ significantly from the original PIA increase calculated using either of these methods (for example, the final benefit could be adjusted based on early or delayed claiming). An additional outcome of modifying the PIA as we do in this analysis is that auxiliary beneficiaries can receive the benefit increase even before they reach age 81.⁹ To maintain equity for auxiliary beneficiaries receiving benefits on the earnings record of someone who dies prior to age 81, the benefit increase is payable starting when that deceased beneficiary would have reached age 81.

These options do not apply to disability insurance beneficiaries who have been receiving benefits for a period comparable to that of a retired worker reaching age 81. Some elder benefit increase provisions specify that the increase will occur “X number of years post-eligibility,” allowing disability insurance recipients to obtain the same type of benefit increase as an older, retired-worker beneficiary. That approach addresses the compounding effect of benefit reductions for long-time beneficiaries. Our analysis does not incorporate that approach, as we focus on the beneficiary population aged 85 or older. Disability insurance beneficiaries who convert to retired-worker status at normal retirement age are also eligible for the 5 percent PIA increase at age 81, but they do not receive special consideration nor the ability to receive the increase before age 81 under the options analyzed here.

Both Options Affect Nearly All Older Beneficiaries

Because these elderly benefit increases do not include any means testing or qualification requirements other than age, we project that nearly all beneficiaries aged 85 and older would see their benefits increase by at least 1 percent above scheduled benefits under either policy option (see tabulation below).

However, some older beneficiaries would not receive a benefit increase. In general, beneficiaries who did not receive higher benefits would belong to one of two groups:

1. Dually entitled beneficiaries for whom the increase in their own worker benefit would be offset by a decrease in their auxiliary benefit because the spouse whose PIA provides the auxiliary benefit is younger than age 81.¹⁰
2. Auxiliary-only beneficiaries with benefits based on the PIA of a spouse younger than age 81. This outcome is another result of applying the benefit increase to the PIA, rather than the actual benefit.

Median Benefit Increases are Higher Under the Individual PIA Plan

Overall, median monthly benefit increases would be higher under the Individual PIA plan, at 5.0 percent above scheduled benefits (see tabulation below). For the Average PIA plan, the median benefit increase would be 3.9 percent. However, the median figures do not capture the greater variety of benefit changes that appear under the Average PIA plan.

Benefit Increases are Proportionally Larger for Lower Income Households Under the Average PIA Plan

The average PIA is a single value that produces a benefit increase of equal dollar value for all elderly beneficiaries, which amounts to a larger percentage increase for those in the lower shared lifetime earnings quintiles (Chart 1).¹¹ For example, among beneficiaries in the lowest shared lifetime earnings quintile, the median benefit increase would be 6.4 percent, compared with 3.4 percent for beneficiaries in the highest quintile. The Individual PIA approach provides an equal percentage increase for all older beneficiaries (5.0 percent), and thus a larger dollar increase for those in the higher shared lifetime earnings quintiles.¹²

Chart 1.
Median percentage change in Social Security benefit under alternative plans to increase PIAs for beneficiaries aged 85 or older, by shared lifetime earnings quintile, projected 2030

SOURCE: Authors' calculations using MINT6.

Elderly Poverty Would Decline Under Both Options

Both of the options would decrease projected poverty among beneficiaries aged 85 and older. Under scheduled benefits, 1.5 percent of this group is projected to be in poverty in 2030 (see tabulation below). The relatively low poverty rate under scheduled benefits reflects projected differential mortality (that is, wealthier individuals are more likely to live to older ages; see Table 1) and the projected decline in poverty due to real wage growth. Under either elder benefit plan, the poverty rate would decline to between 1.1 and 1.2 percent. However, note that if these elderly benefit increases were coupled with other policy changes that reduce benefits, the number of beneficiaries aged 85 or older at or near poverty might not decline (or could rise), as any increase might be offset by reductions elsewhere.¹³