Rep. Ford's Social Security "Bridge" Benefit Proposal for Dislocated WorkersMarch 25, 2004
Representative Harold Ford Jr. is proposing a new Social Security “bridge” benefit to supplement the wages of certain workers nearing retirement age. This idea could be integrated into a larger reform proposal, and it could help open new avenues for bipartisan discussion on an issue usually characterized by partisan gridlock.
The Social Security debate in Washington is stale and ritualistic. Republicans tout personal retirement accounts without budgeting for the inevitable transition costs. Democrats denounce "privatization" without explaining how they would solve Social Security's future budget problems.
Both sides could benefit from some fresh thinking.
Try as legislators might, the Social Security reform question won't go away. First, Social Security spending is projected to rise by 2 percent of GDP over the next 25 years, as the large baby boom generation joins the rolls. Unless we cut spending by an equivalent amount, future generations of workers will face steep increases in payroll taxes or huge budget deficits that retard economic growth.
Second, personal accounts are probably the best way to "pre-fund" any Social Security reforms. The alternative of government "lockboxes" or "guarantees" amounts to wishful thinking.
Third, done correctly, personal accounts could be an important wealth building tool for low-income workers who would otherwise have difficulty saving and accumulating assets of their own.
Finally, the gridlock on Social Security inhibits new ideas for using the Social Security system to solve real problems.
That is why Mr. Ford's proposal is so interesting.
Workers aged 60 or 61 could apply for the "bridge" benefit. The benefit would amount to 25 percent of a worker’s future retirement benefit. It would be “paid back” via a permanent 3 percent reduction in the worker’s regular post-retirement Social Security benefits. This is an actuarially fair amount, which would appropriately replenish the Social Security fund.
The bridge benefit could help pay for health insurance or other necessities, which can be unaffordable to older workers who have been forced to accept large pay cuts or low-paying jobs outside their usual profession. The bridge benefit would provide a modicum of relief to many dislocated workers for whom retraining or career change is not really an option.
Here are some preliminary specifications of the Ford proposal:
Eligibility: Dislocated workers aged 60 or 61 earning at least $10,000 a year who worked for at least a 25-year career would be eligible for the bridge benefit. The target group is workers who cannot find jobs in their main career occupation, or who have taken a significant wage cut. Workers earning more than $40,000 a year would not be eligible, even if that income level represented a significant wage cut.
Benefits: The bridge benefit would be 25 percent of the future (age 62) benefit, as computed by the Social Security Administration based on the worker’s prior earnings history. Workers’ earnings while on the bridge program would continue to accrue toward their subsequent Social Security benefits.
Pay Back: Worker would "pay back" their bridge benefits through a permanent 3 percent reduction in their regular Social Security benefits after age 62. Thus, when a worker who had enrolled in the bridge program retired at age 62, his or her subsequent Social Security benefits would be by 3 percent less than would otherwise have been the case. Workers in the bridge program for less than 2 years (perhaps because they enrolled at age 61) would have a smaller reduction in their post-retirement benefits. Workers could continue to enroll in the bridge program after age 62, and would receive the actuarially fair retirement benefit -- accounting for the bridge benefits they received -- when they chose to retire, as determined by Social Security.
Eligibility Determinations: Workers would apply via Social Security, and would sign a statement explaining that they understand their future benefits would be reduced by up to 3 percent. Social Security would determine that they had worked for a 25-year span, and that their current earnings were in the qualifying range.
Impact on Social Security Financing: The bridge proposal would increase Social Security costs in the first years of enactment. However, the proposal would have a roughly neutral impact on Social Security’s financial balance in the long run, as workers “paid back” their bridge benefits.
Budget Impact: There are about 5 million people aged 60 and 61. Assuming as many as 500,000 workers applied for bridge benefits, and the average benefit was $250 per month, the initial federal cost would be as high as $1.5 billion a year. However, as workers began to repay their bridge benefits in subsequent years, the annual federal cost would shrink. There is a chance that less healthy workers, who knew their life expectancies were likely to be shorter than average, would sign up for bridge benefits in disproportionate numbers. However, this is unlikely to cause a substantial reduction in the amounts paid back to Social Security.
Coordination with Personal Accounts: In general, personal retirement accounts included as part of a Social Security reform proposal should be used for retirement only, and should not be tapped prior to retirement by workers, even in hardship cases. This is part of the reason for the bridge benefit program. If low-income, near-retirement age workers needed additional assistance, it should be handled via improvements in Social Security’s defined benefits or its disability program, not though early use of personal accounts.
Importantly, most Social Security reform proposals include new "minimum" benefits designed to prevent workers who worked a full career from falling into poverty. In some cases, the minimum benefit would prevent the "pay back" of a bridge benefit from tipping retirees into poverty.
Why use Social Security to assist needy older workers? The main reason is public acceptance.
For all its oddities and looming budgetary problems, Social Security has dramatically reduced poverty among retired Americans. It is a program that workers are proud of -- it is not welfare or a handout. As such, the "pay back" rules of Mr. Ford's bridge proposal are very important. By paying back their pre-retirement benefits, workers facing a hardship situation fulfill the social contract.
Rep. Ford's proposal would address a real problem facing older workers in the U.S. economy. Wage cuts and job dislocations are common as the economy becomes more competitive and U.S. industries face global competition.
The bridge benefit idea deserves to be part of the mix as realistic members of Congress begin to face the entitlement reform debate.
Links:
Centrists.Org A First Look at the New Medicare Trustees Report (preliminary March 24, 2004)
Centrists.Org The Kolbe-Stenholm Social Security Reform Plan (revised February 14, 2004)
Centrists.Org Budgetary Effects of the Diamond-Orszag Social Security Proposal
(revised December 31, 2003)
Centrists.Org Unfunded Transition Costs of the Ferrara Social Security Proposal
(revised December 10, 2003)
Centrists.Org A Preliminary Analysis of Sen. Graham's Social Security Proposal
(revised November 18, 2003)
Centrists.Org Raising the Cap on Payroll Taxes Doesn't Solve the Social Security Problem
(November 17, 2003)
Centrist Policy Network Put Social Security Reform in the President's Budget (November 17, 2003)
Centrists.Org Suggestions for Income Testing in Social Insurance Programs (October 27, 2003)
Centrist Policy Network A Challenge To Both Left and Right on Social Security Reform
(September 16, 2003)
Centrists.Org Issue Summary: Wealth Building (Basics)
Centrists.Org Issue Summary: Social Security Reform
