Social Security
Current Reform Proposals:
How They Would Affect
People With Disabilities
Consortium for Citizens with Disabilities
June 1, 2011
Social Security
Background on the
Social Security Programs
June 2011
Consortium for Citizens with Disabilities
2
Social Security


54.2 million people receive Social
Security benefits from the
retirement, disability, and survivors
programs
More than one-third of all monthly
checks go to non-retired individuals
June 2011
Consortium for Citizens with Disabilities
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Social Security Insurance

Retirement – insures against poverty after
worker retires

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Includes retirees with disabilities
Spouses, including those with disabilities
Disabled Adult Children
Example of people with increased reliance on
Social Security benefits

Parents of children with disabilities with reduced
earnings and savings due to care giving
June 2011
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Disabilities
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Social Security Insurance
(continued)

Survivors – provides benefits to dependents after
an insured individual (worker, disability insurance
or retirement insurance beneficiary) dies
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Minor children and spouses of deceased
workers and retirees
Disabled widow(ers)
Disabled adult children
June 2011
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Social Security Insurance
(continued)

Disability – insures against loss of ability to work due
to disability

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Disabled workers, their spouses and children, including
disabled adult children
Essential protection

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Millions of families face disability
Adults with serious disabilities have very low employment
rate
Poverty rates twice as high for workers with disabilities as
other groups who receive Social Security
Equals half or more of TOTAL family income for about half
of disabled worker beneficiaries
June 2011
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Current Design: The Positives

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Fixed monthly payment
Ability to move among three programs:
work history, age, & eligibility category
Pay multiple family members based on one
worker’s earnings
Adjusted annually for inflation (generally)
June 2011
Consortium for Citizens with
Disabilities
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Social Security
Background on
Financing and Long-Term
Solvency
June 2011
Consortium for Citizens with
Disabilities
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Social Security & the Deficit

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
National groups examining ways to reduce
deficit, including Social Security changes
Social Security did NOT cause the deficit
Cutting benefits will NOT solve budget crisis
Cutting benefits will deepen financial crisis
for many people with disabilities
June 2011
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Disabilities
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Social Security & the Deficit

June 2011
Social Security did NOT cause the
deficit:
 It is self-funded
 By law, it can only spend money
dedicated to the program
 No borrowing authority
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Disabilities
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Social Security’s Finances
 It is NOT a crisis
 Social Security does face a
long-term financing shortfall
 Only modest changes are
needed to address shortfall
June 2011
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Current & Future Surplus
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June 2011
Surplus = invested assets or Trust Fund
reserves
$2.6 trillion by end 2010
Will continue to grow 2011-2022
Projected to reach $3.7 trillion by 2022
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Projected Shortfall Over 75 Years
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June 2011
Less than 1 percent of Gross Domestic
Product (GDP)
Another measure = 2.22 percent of
taxable payroll
Previous Trustees’ forecasts = similar
projection
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Future Projections
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June 2011
Pay 100% of scheduled benefits
 2011 Trustees Report: until 2036
Pay reduced benefits (if no action
taken)
 2011 Trustees Report: 77% of
scheduled benefits starting 2037
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Disabilities
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Social Security
Background:
How Social Security Benefits
Are Calculated
June 2011
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Disabilities
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How Social Security
Benefits Are Calculated

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Benefit calculations under all
programs (retirement, disability,
survivors) use the same benefit
formula
Benefit formula is used to calculate
Primary Insurance Amount or PIA
June 2011
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How Social Security Benefits
Are Calculated (continued)

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Calculated based on the earnings
of the worker
Worker must have enough credits,
or “quarters of coverage,” to be
eligible
Must have paid in 40 quarters or 10
years to be fully insured
June 2011
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Disabilities
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How Social Security Benefits
Are Calculated (continued)

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Younger workers qualify under the
disability or survivor programs with
fewer credits
Exact number of quarters required
is dependent on the age of the
worker at the time of disability or
death
June 2011
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Disabilities
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How Social Security Benefits
Are Calculated (continued)

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Social Security benefit amount is based
on the worker’s average earnings over
their years of work
Retirement Benefit: Based on 35 years
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June 2011
“Zero years” included if less than 35 years
Lowest years “dropped” out (if more than
35)
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How Social Security Benefits
Are Calculated (continued)

Disability and survivors benefits: Number
of years based on age of worker at onset
of disability or death

Use “elapsed” years

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The number of full calendar years since the
person turned 21
If age 47 or over – get 5 “dropped” years
Under age 47 – get 4 or less “dropped”
years
Consortium for Citizens with
June 2011
Disabilities
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How Social Security Benefits
Are Calculated (continued)

Once earnings determined, SSA
“indexes” the person’s earnings

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Done to update earnings to current levels
Reflects earnings increases in average
wage levels for each year
Calculation results in Average Indexed
Monthly Earnings or AIME
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How Social Security Benefits
Are Calculated (continued)

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Plug AIME into benefit formula
Formula Replaces Percentage of AIME – Current
Formula (2011)
 0-$749 = Replace 90%
 $749-$4517 = Replace 32%
 $4517 and up to taxable max = Replace 15%
Dollar amounts at which replacement percentage
changes ($749, $4517) are known as “bend points”
June 2011
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How Social Security Benefits
Are Calculated (continued)

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Bend points change every year
Replacement percentages in formula set
by statute and do not change unless
Congress changes them
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How Social Security Benefits
Are Calculated (continued)

This calculation determines Primary Insurance
Amount (PIA):
Retirement Program

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Get full PIA as monthly benefit if retire at your Full Retirement
Age (FRA) – also sometimes referred to as Normal Retirement
Age (NRA)
Benefit is reduced if retire before then – amount of reduction
based on how long before reach full retirement age begin to
collect benefits
Youngest age at which benefits can be collected is known as Early
Retirement Age or ERA
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How Social Security Benefits
Are Calculated (continued)

Disability and survivors benefits are
calculated as if someone retires at FRA
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Based on the full PIA
Not reduced regardless of age at which
disability onset or death occurs
PIA is also plugged into another formula
to determine “family maximum” to
determine benefits of family members
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Benefits Are Modest Under
Current Formula
June 2011
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Benefits Are Large Percent of Income for
Lower Income Retirees
June 2011
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Disabilities
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Proposals and Options for
Achieving Long-Term
Solvency of the Social
Security Programs
June 2011
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Disabilities
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Possible Options: Solvency
Two approaches, but could
combine options from each:
 Cut benefits
 Increase revenue
June 2011
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Disabilities
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What Is Needed to Achieve
Long-Term Solvency
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June 2011
Often looked at as a percentage of
payroll
As stated earlier: Need revenue
increases or benefit cuts = to 2.22% of
taxable payroll to make up shortage
Will explain how much of the shortfall
each option will solve (as available)
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Disabilities
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Major Reform Proposals
to Date

National Commission on Fiscal Responsibility
and Reform – known as Bowles/Simpson
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Recommendations of Co-Chairs only
Commission Member Representative Jan
Schakowsky (D-IL) also made recommendations
Bipartisan Policy Center Debt Reduction
Taskforce – known as Rivlin/Domenici
June 2011
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Disabilities
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Specific Proposals:
Benefit Cuts
June 2011
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Disabilities
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Proposal 1: Change the
Benefit Formula

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Achieve program savings by changing the
replacement percentages in the benefit formula
Can be done:
 Progressively: Change the replacement
percentages for top earners only (i.e., decrease
the percentage)
 Regressively: Change the replacement
percentages for all earners
June 2011
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Disabilities
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Proposal Specifics:
Bowles/Simpson
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Bowles/Simpson (new formula)
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$0-$9,000 = 90% replacement
$9,000 - $38,000 = 30%
$38,000 - $64,000 = 10%
$64,000 - max = 5%
Based on annual earnings rather than AIME
Results in benefit cuts for everyone with average
annual earnings over $9,000
Restores 0.86% of taxable payroll or 39% of
shortfall
Consortium for Citizens with
June 2011
Disabilities
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Proposal Specifics:
Rivlin/Domenici

Rivlin/Domenici (new formula)
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$0-$749 = 90% replacement
$749 - $4,517 = 32%
$4,517 - max = 10%
Results in benefit cuts only for those
beneficiaries with average monthly earnings
over $4,517 ($54,204/year)
Restores 0.07% of payroll or 3.2% of
shortfall
June 2011
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Disabilities
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Impact on People with
Disabilities
Any change to the benefit formula
that decreases the replacement
percentages will result in benefit
cuts to people with disabilities in
all benefit programs –
retirement, disability, survivors
June 2011
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Other Possible Formula Changes
Resulting in Benefit Cuts

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Increase the number of years used
in calculating the AIME
Change from wage indexing to
price indexing when calculating the
AIME
Not included in proposals discussed
today
June 2011
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Disabilities
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Proposal 2: Change the
Retirement Age

Current FRA (full retirement age) –
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66 for current retirees – up from 65
Under current law, gradually being raised
to 67 for all people born after 1960
Current ERA (early retirement age)
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June 2011
62 for all retirees
Not set to increase under current law
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Proposal Specifics

Bowles/Simpson
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Raise NRA to 68 by 2050 and 69 by 2075
Raise ERA to 63 by 2075
Restores 0.34% of taxable payroll or 15.3% of shortfall
Rivlin/Domenici
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Does not include an increase in the retirement age per se
Indexes new benefits for longevity instead
Replacement rate will be 99.7% of benefits the year before
Restores 0.48% of taxable payroll or 21.6% of shortfall
June 2011
Consortium for Citizens with
Disabilities
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Raising the Retirement Age
Is a Benefit Cut
June 2011
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Impact on People with
Disabilities

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Benefit cut for workers with
disabilities who work until they
reach retirement age or who retire
early
Benefit cut for people receiving
family benefits from a retired
worker
June 2011
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Disabilities
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Impact on People with
Disabilities (continued)

No direct effect on people receiving benefits under
disability program but:
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Disability applications already increasing due to current
law increase in retirement age
Raising the ERA:
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Leaves people with disabilities in their early 60s, but who do not
meet the stringent requirements for Disability Insurance (DI)
program, without Social Security insurance coverage
Will cause more workers to apply for DI benefits
Will increase the administrative workload, processing time for
disability applications, and delay in benefit awards
June 2011
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Disabilities
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Proposal 3: Change the Cost
of Living Adjustment Formula
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Current law provides for an annual Cost of
Living Adjustment or COLA for benefits under
all programs
Helps protect the value of benefits against
inflation
Current COLA is based on the change in the
CPI-W (Consumer Price Index for Urban Wage
Earners and Clerical Worker)

June 2011
There was no COLA for 2010 or 2011
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Disabilities
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Proposal 3: Cost of Living
Adjustment Formula (cont)

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Reform proponents argue that the current
measure overstates inflation
Propose to change to another measure known
as the “chained CPI”

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Generally finds a smaller increase in the cost of living
year to year
Bases its rate on “substitution effect”
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June 2011
When prices on a particular item go up, people will
substitute other less expensive items in their place (e.g. if
steak prices rise, a person will buy hamburger instead)
Consortium for Citizens with
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Proposal Specifics

Bowles/Simpson
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Change to “Chained CPI”
Restores 0.50% taxable payroll or 22% of
shortfall
Rivlin/Domenici
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June 2011
Change to “Chained CPI”
Restores 0.49% taxable payroll or 22% of
shortfall
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Why the Chained CPI Is
Not More Accurate

More applicable to higher income earners

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Not applicable to many seniors or people with
disabilities

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Can’t substitute hamburger for steak if already
only eating hamburger or no meat
Majority of expenses are to meet basic needs
Underestimates expenses like medical care on
which people with disabilities and seniors
spend a larger percentage of their income
June 2011
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Impact on People with
Disabilities
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Change in COLA will result in a benefit cut for all
people receiving benefits under all Social Security
programs
Effect is cumulative
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The longer a person receives benefits the greater the
benefit cut will be
People receiving disability benefits tend to receive benefits
longer than people who receive benefits under other
programs
Value of benefits no longer adequately protected
from inflation
June 2011
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Disabilities
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Proposals to Address
Long-Term Solvency:
Revenue Enhancements
June 2011
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Disabilities
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Current Revenue Design

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Almost every worker pays in – some state
and local workers do not
Current FICA Tax Rate: 12.4% of earnings

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6.2% paid by employee
6.2% paid by employer
Earnings taxed are capped at $106,800 –
adjusted annually
Only earnings in the form of wages are taxed
– dividends and capital gains are not
June 2011
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Disabilities
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Interest Revenue

Two sources of revenue to the Social
Security Trust Funds:
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FICA Taxes
Interest earned on money in Trust Funds
Trust Funds invested in U.S. Treasury
bonds
Steady return with no risk
May 2011
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Disabilities
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Proposal 1: Raise or eliminate
the cap on earnings

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Historically, 90% of total earnings have
been taxed
Currently, only about 83% of earnings
taxed

June 2011
Lower percentage due in large part to
earnings cap amount increases lagging
behind growth in income of high earners
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Disabilities
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Proposal Specifics

Phase in increase in cap to capture 90% of
wages

Bowles/Simpson – by 2050


Restores 0.67% of payroll or 30.2% of shortfall
Rivlin/Domenici – over 38 years

Restores 0.60% of payroll or 27% of shortfall
June 2011
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Proposal Specifics (continued)

Eliminate cap on employers and keep
cap for employees the same
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June 2011
Rep. Schakowsky – 74% of shortfall
eliminated based on 2010 Trustees Report
(not provided as percent of payroll)
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Proposal 2: Increase FICA Rates


Current Rate: 12.4% (6.2% employee; 6.2%
employer)
Immediately increase by 1.1% on each –
7.3% each

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Restores 2.09% of payroll or 94.1% of shortfall
Medium earner with $43,451 annual earnings
– increase of $478 a year or $9.19/week
Not included in any current proposal
June 2011
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Proposal 2: Increase FICA Rates
(continued)

Gradually increase by 1% over 20 years
starting in 2015– 7.2% each by 2035

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Restores 1.39% of taxable payroll or 63% of
shortfall
Average earner in 2015 with $53,085 annual
earnings – increase of $26.50 a year or
$.50/week
Not included in any current proposal
June 2011
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Disabilities
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Proposal 3: Require Uncovered
Workers to Contribute
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June 2011
Almost all U.S. workers pay into the
Social Security system
Currently 8 states have more than half
their state and local workers not
covered by the Social Security system
and who don’t pay FICA contributions
Are covered by public pensions instead
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Disabilities
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Proposal Specifics

Have all newly hired state and local
workers be covered and pay in

Bowles/Simpson – by 2020

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Restores 0.16% of payroll or 7.2% of shortfall
Rivlin/Domenici – by 2020
Restores 0.16% of payroll or 7.2% of shortfall
Note: in 75th year would be -.12% of payroll when
state and local workers begin to collect benefits

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June 2011
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Proposal 4: Eliminate tax free
status of cafeteria plans

People currently pay FICA taxes on
401(k) contributions but not on flexible
spending accounts

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June 2011
Health Savings Account
Dependent Care Savings Account
Transit Savings Accounts
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Disabilities
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Proposal Specifics

Rep. Schakowsky - Require employees
and employers to pay FICA taxes on all
flexible savings account contributions

June 2011
Restores 0.25% of payroll or 11.26% of
the shortfall
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Disabilities
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Revenue Changes: Impact on
People with Disabilities

Workers with disabilities would have
less take home pay if:

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FICA rates for employees increased
They have earnings above current taxable
maximums and the cap is raised
No direct impact on people with
disabilities receiving benefits under any
of the Social Security programs
June 2011
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Disabilities
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Principles for Achieving
Long-Term Solvency of
the Social Security
Programs
June 2011
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Disabilities
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General Principles

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Social Security is NOT in crisis
Social Security changes should not be included in
deficit reduction legislation
The Social Security programs should not be
included in proposals that cap overall federal
spending
Modest premium contribution adjustments, rather
than benefit cuts, should be used to address longterm solvency of the Social Security programs
June 2011
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Disabilities
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Principles (continued)

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Do not change basic design based on
payroll taxes
Preserve as social insurance for disability,
survivors & retirement
Guarantee monthly benefits adjusted for
inflation
Preserve current & future benefits
Restore program’s long term funding
June 2011
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For More Information
To find fact sheets regarding Social
Security and disability, links to helpful
resources, or to access a recording of
this webinar, please visit
www.disabilityandsocialsecurity.org
June 2011
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Disabilities
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Webinar Sponsors
This webinar has been sponsored by the
Consortium for Citizens with Disabilities.
Funding was provided through a grant
administered by the National Academy
of Social Insurance and provided by the
Ford Foundation.
June 2011
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Disabilities
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