US public pensions, known as “Social Security”, are based on contributions (payroll taxes) of 12.4%. The contribution base is capped, currently at $118,500 a year. This cap increases yearly with increases in average wages. Pension benefits are based on the beneficiary’s age at retirement and on his or her contribution history. Participants with fewer than 40 quarters (10 years) of contributions are not eligible for any pension, nor a refund of contributions, but US residents with a small (or no) Social Security pension can apply for means-tested Supplemental Security Income (SSI). As of 2015, SSI was a maximum of $783 monthly for an individual or $1100 monthly for a couple, less than the official poverty level. SSI is financed from general government revenue, not from Social Security contributions.
Non-contributory Social Security pensions are also paid as a supplement to spouses and widows (or widowers) of retirees who receive contributory pensions. These supplements are financed from Social Security contributions. The spousal supplement is equal to one-half the benefit of the contributor’s pension, or a top-up, when necessary, to bring the spouse’s pension to one-half that of the primary contributor. A widow (or widower) can claim the full pension of her (or his) deceased spouse, unless the survivor is already receiving a Social Security pension with equal or greater benefits.
The Heritage Foundation wants to reduce Social Security expenditure. This is the brief mission statement posted on its web page:
Social Security began running deficits in 2010 and without reforms, Social Security’s permanent and growing deficits will help fuel our spending and debt crisis. Reform should strengthen retirement security, target Social Security benefits to those who are most in need, and gradually increase the retirement age to reflect gains in life expectancy.
Details are provided in five pages of a 49-page agenda for fiscal reform. Here are relevant extracts from those pages.
Heritage proposes to … strengthen the Social Security system by tightening its benefits and returning it to its original purpose: a guarantee that older Americans won’t fall into poverty. ….
Social Security will gradually be transformed from an “income replacement” system … into a flat payment to those who work more than 35 years—a flat payment that is sufficient to keep them out of poverty throughout their retirement. ….
The flat benefit will be the equivalent of about $1,200 per month in 2010 dollars when the reform is complete. This is both higher than today’s average Social Security retirement benefit payment ($1,164 per month) and well above the 2009 poverty level for a single adult over age 65 ($857 per month). To ensure that future retirees do not slip back into poverty, the flat benefit level will be indexed for wage growth. ….
[T]he program will concentrate on protecting the economic security of retirees rather than following the current approach of promising unaffordable benefits to all without regard to need.
This new approach means that retirees with substantial non–Social Security retirement income will start receiving a lower benefit on a sliding scale that gradually reduces Social Security checks to zero for those with the highest non–Social Security incomes. This transparent mechanism will apply to benefits received by affluent Americans under both the current system and the flat-rate system. ….
The Heritage approach, when fully phased in, would income-adjust benefits transparently and not tax the benefits a senior receives. …. [O]nly about 9 percent of seniors would see their checks reduced and only just over 3.5 percent of seniors would receive no check.
The Heritage Foundation, “Social Security”, Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity (2011), pp. 11-15.
The Heritage Plan promises a large decrease in Social Security expenditure. With a flat pension larger than the average Social Security benefit, and means-tests that affect only a small percentage of retirees, how is this possible?
The only possible explanation is that the number of beneficiaries will be drastically reduced. This detail is not highlighted in the Heritage brochure. Note that 10 years of contributions are currently necessary to qualify for Social Security benefits. With the Heritage plan, this will increase to 35 years. In addition, the flat pension is for workers only. There is no spousal supplement.
Note also that the average pension of remaining beneficiaries is undoubtedly much larger than the cited average of $1,164 per month. In brief, the number of beneficiaries will fall, and the average pension of those remaining will also fall with the move to a flat pension, even before clawing back benefits from non–Social Security incomes.
To add insult to injury, the Heritage plan overstates fiscal savings. With fewer Social Security pensioners, more older persons will be eligible for SSI benefits. This additional expenditure on social assistance is ignored.