Proposal: Social Security BRIDGE1Introduction Social Security’s benefits to retirees are paid in the form of an inflation-adjusted annuity.To preserve the financial integrity of the system, it is important a minimum allowable retirementage be set to prevent would-be “retirees” from leaving work and claiming benefits at anunreasonably young age. The retirement age represents an arbitrary barrier to the socialinsurance program, and has left millions of elderly Americans caught between unemploymentand retirement. Social Security BRIDGE closes that gap by providing a subsistence level ofincome to these involuntarily retired Americans.The Problem The Social Security program has done an excellent job in reducing poverty rates amongAmerica’s elderly.2 But the age restrictions on Social Security leave many older Americanswithout coverage, and therefore without the social insurance enjoyed by those who have reachedthe eligibility age. To understand the impact of this arbitrary age distinction, we can observeoutcomes for populations within several key subgroups. Fig.1 outlines post-WWIIunemployment rates for people below the full Social Security eligibility age and for those aboveit. With few exceptions, the unemployment rate for persons below full retirement age has beenhistorically higher. It is possible to argue that this discrepancy is due to the impact of SocialSecurity on labor force participation – i.e., when people who are eligible for Social Securitybecome unemployed, they exercise the option to formally retire and begin collecting benefits. The impact of this decision can be seen more clearly in Fig. 2, which details the medianduration of unemployment across age groups. The universal trend is for the length of anunemployment spell to increase with the age of the unemployed person. However, above the ageof 65, the length of the median unemployment spell is decreased relative to the next oldestgroup, suggesting that unemployed elderly persons are choosing to withdraw from the laborforce rather than remain unemployed. In other words, they have become involuntarily retired.1 Bridge Retirement Insurance for the Discouraged Elderly.2 “Social Security Reduces Elderly Poverty,” The Social Security Network.
An additional oddity displayed in the chart is that the median duration of unemploymentfor the group aged 55-64 has not increased at the trend rate. This fact suggests that the trendreversal occurs within this group. To attribute the reversal to retirement decisions made under theSocial Security program, it is necessary to examine more closely the impact of the program onthe marginal subgroups aged 55-61 and 62-64 in addition to the group aged 65 and above. Fig. 3shows clearly the distinction between the groups aged 55-61 and 62-64. The former is noteligible for Social Security retirement benefits; the latter may claim them at a reduced rate. Thesharp reduction in unemployment rates observed after this cutoff – between .5% and 1% –provides further evidence that availability of Social Security for the involuntarily retired leadsthem to withdraw from the labor force rather than remain unemployed. But what happens tothose who are not yet eligible for benefits? Given that the unemployed are generally found at the bottom of the income distributionin a given group, a closer look at that population segment will reveal the financial consequencesof the Social Security cutoff. Fig. 4 details this impact. Generally, younger groups have higherincome levels at every point in the distribution, which is consistent with their greater earningpower. But below a critical level – 11.5% – older groups tend to have higher income levels. Thisdiscrepancy suggests that Social Security, the primary income program available to older groupsbut not younger ones, has significantly raised the living standards of the poorest segment of thepopulation over age 65, while leaving behind those in the lower age categories. This gapespecially effects the involuntarily retired, who lack sufficient financial resources for retirement.The Solution The age of eligibility for Social Security retirement benefits has been on the rise forseveral years now.3 Three-quarters of participants, however, choose to retire before they areeligible for full benefits, and many elect to do so immediately when they become eligible for anybenefits.4 The data suggests that this behavior is especially common among persons who areunemployed when they reach the age of eligibility for retirement benefits. However, youngerpersons do not have this option. Persons aged 55-61 must bear a large financial burden whenthey become unemployed, especially given the unique expenses of old age, including increased3 Peter A. Diamond and Peter R. Orszag, Saving Social Security (2004) 20.4 Diamond and Orszag 21. -2-
medical costs. Extending a financial lifeline to such people in times of dire need is thefundamental function of social insurance programs, and the existing framework of SocialSecurity can bridge the gap between unemployment and retirement for America’s elderly. Social Security BRIDGE is designed to provide this fundamental financial support to theinvoluntarily retired. Under the program, individuals above the age of 55 who meet the followingcriteria become eligible for BRIDGE involuntary retirement benefits: 1) Have 35 years or more of work history; that is, no zeroes are figured into the AIME. 2) Have been unemployed and actively seeking work for more than 52 weeks.Satisfaction of the second criterion is to be determined by the same local entity who woulddetermine eligibility for unemployment insurance (UI) benefits. If these two conditions are met,that agency will refer applicants to the Social Security BRIDGE liaison. BRIDGE benefits aredisbursed in a fashion identical to regular Social Security benefits, and they are calculatedaccording to the same formula as is used for early retirees 5 based on the number of monthsbefore full retirement age the person has entered the Social Security BRIDGE program. Themaximum reduction is capped at the level corresponding to 50% of PIA. The benefit reduction isthen phased out each month so that at the minimum retirement age, it exactly equals thereduction that would have been incurred by retiring at that age. At this point a BRIDGEbeneficiary is transferred into the general Social Security pool and the benefit rate is fixed. In order to avoid creating an “unemployment tunnel”6 to retirement as has occurred withsimilar programs around the world, the BRIDGE transition occurs independent of UI eligibility.This means that, in normal times, unemployment benefits will generally have expired well beforeBRIDGE benefits become available. This creates a disincentive for workers or firms to pursueunemployment as a route to government-financed retirement. Additionally, during periods ofeconomic hardship leading to UI extensions, the BRIDGE program provides significant savingsfor general budgets at the state and federal level, as the involuntarily retired no longer depend onUI for financial support. Instead, their well-being is insured and protected by the BRIDGEprogram.5 “Retirement benefits by year of birth,” Social Security Administration.6 Tomi Kyyra and Ralf A. Wilke, “Reduction in the Long-Term Unemployment of the Elderly: A Success Storyfrom Finland Revised” (2006). -3-
Fig. 1 Unemployment Rates Among The Elderly 12-month moving average. Shaded area indicates recessions. Source: Bureau of Labor Statistics, NBER, authors calculations8% 55-64 65+7%6%5%4%3%2%1%0% 48 52 56 60 64 68 72 76 80 84 88 92 96 00 04 08 Fig. 2 Median Duration of Unemployment Source: Bureau of Labor Statistics 20 18 16 National Average 14 12 Weeks 10 8 6 4 2 0 16-19 20-24 25-34 35-44 45-54 55-64 65+ -4-
Fig. 3 Marginal Subgroup Unemployment Source: Urban Institute8% 55-61 62-647%6%5%4%3%2%1%0% Men Women Fig. 4 Income Distribution in the Lowest Quintile Source: Social Security Administration, authors calculations $15,000 $13,000 $11,000 $9,000 Maximum Income $7,000 $5,000 51-54 $3,000 62-64 65+ $1,000 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Percent of Population -5-