AARP’s Policy on Social Security Carve Outs

Although a strong retirement is based on four pillars– Social Security, pensions and savings, earnings, and health insurance– Social Security continues to be the most important one for the most people.

• Six out of ten beneficiaries today derive more than half of their income from Social
Security.
• Nine out of ten individuals aged 65 plus receive Social Security.
• Among poor households of retirement age, Social Security is virtually the only source of retirement income.
• Social Security plays a crucial role reducing poverty among older people, particularly women and minorities. Half of all older Americans would be in poverty without Social Security.
• Social Security provides guaranteed inflation proof benefits you cannot outlive.

The problem Social Security faces isn’t as big as some have claimed. Without any kind of change at all, Social Security will do just what it’s been doing– paying 100% of promised benefits– until 2041. Even after 2041, incoming revenue will be enough to pay 72% of benefits. But that is not good enough for future retirees. We must restore the long term solvency of Social Security.

For Social Security to remain strong for future generations, some adjustments must be made to ensure its long-term solvency. Solvency options generally fall into three categories:

1. Benefit reductions (one example of this would be changing the benefit formula)
2. Revenue enhancers (some examples of this includes tax increases and general revenue subsidies)
3. Increase trust fund investments (hire money managers to invest Social Security funds collectively, benefits would still be guaranteed)

Many Social Security experts would restore long-term solvency in ways that maintain the program’s basic guarantees and protections. Others suggest a fundamental restructuring that would move the program away from its income insurance foundation to one with individual accounts financed with portions of current payroll taxes. These accounts, commonly called “carve-outs,” would replace some of Social Security’s guaranteed benefit with a non-guaranteed, individual savings plan. It would be expensive and expose many individuals to unnecessary risk, particularly low-wage workers who are less able to tolerate risk.

There are two basic approaches to individual accounts:

• Add-ons : Those that maintain the current benefit structure and add on individual accounts. These have no impact on solvency. We would still need to fix the short fall.
• Carve-outs: Those that would create individual accounts by using part of the taxes that fund Social Security benefits. Although carve-outs are touted as a fix, they worsen solvency and increase the need for benefit reductions. Instituting carve-out account entails a substantially larger reduction in basic Social Security benefits and/or a greater increase in taxes to maintain the benefits promised to current and soon-to-be retirees.

Who would be hurt by carve-outs?

• Disadvantage low-wage earners, predominantly women and minorities, for whom Social Security benefits represent a larger portion of preretirement earnings than they do for average and higher earners.
• Low-income earners would have less to invest and might be less able than higher earners to manage and diversify their portfolios. (Lower income workers are already at a disadvantage because their lower earnings mean lower pension amounts.)
• Many women would be disadvantaged because they live longer and are protected by Social Security’s lifetime guarantee of annual cost-of-living adjustments. Since these accounts would be individually owned, women could lose important rights to their spouse’s benefits.
• Social Security disability insurance beneficiaries. Young workers who become disabled could receive a smaller lifetime benefit because they did not have enough time to build up their individual account and cannot contribute once they withdraw from the labor force.
• African-Americans represent 12 percent of the population, but make up 18 percent of workers receiving Social Security disability benefits; their children represent 21 percent of those who receive benefits as the child of a disabled worker.
• Surviving spouses’ benefits could be jeopardized. 4.9 million widow(er)s receive a survivor benefit because a worker has died. Many individual accounts would be too small to provide these benefits, particularly if the worker dies at an early age.
• Today’s young workers would have to pay twice: once for their own benefits and again for the benefits of people currently or soon to be receiving them. Social Security Administration actuaries estimate that the cost of financing a transition from current law to a substantially privatized system would be $7 trillion over close to ten years.

AARP believes that Social Security for future generations should not be replaced by the risk-related gains assumed to come from individual investment. Measures to increase individuals’ savings for retirement are to be encouraged but should be in addition to, not instead of, Social Security’s guaranteed benefits.

Social Security’s guaranteed old age, survivor, and disability benefits should not be replaced by individual accounts financed with the payroll tax dollars necessary to fund current and future benefits.