ESTIMATES OF FUTURE RETIREMENT BENEFITS Worker and spouse now age 51 will reach age 65 in January 1994, retirement at end of 1993, benefits beginning January 19941 Example 1. 1993 earnings $18,940 or $1,578 a month (low earnings): Worker only---. Worker and spouse... Total paid into social security by worker: $15,615. Example 2. 1993 earnings $37,879 or $3,157 a month (average earnings): Worker only. Worker and spouse.. Total paid into social security by worker: $31,230. Example 3. 1993 earnings $84,900 or $7,075 a month (maximum 1 Benefit estimates based on the intermediate assumptions used in the 1980 Social Security Trustees' Report. Chart 1 shows average monthly benefits for some selected family groups. The benefits paid to disabled workers do not ordinarily include reduced benefits, and greater continuity of recent earnings are required to be eligible for disability insurance benefits than for retirement benefits. This is at least a partial explanation for the fact that the average benefit for disabled workers is higher than the average benefit for retired workers-$370 as compared with $338 for July 1980. A wife's benefit beginning at or after age 65 is equal to one-half of the amount her husband would get if he retired at age 65 (his primary insurance amount). The average benefit for a worker and his wife is $562 in 1980. The average benefit amounts for retired workers and aged couples take account of the fact that benefits for older workers and their spouses are reduced if taken before age 65 to account for the longer period of time benefits would be received. Currently, more than twothirds of the workers retire before age 65 and get benefits that may be reduced as much as 20 percent below the amount payable at age 65. The amount of a widow's benefit depends on her age at the time she starts getting benefits and whether her husband got reduced retirement benefits. The benefit for a widow who starts getting benefits at or after age 65 and whose husband did not get reduced benefits is 100 percent of her husband's unreduced benefit amount (the worker's PIA). All other widows-those who start getting benefits before age 65 (benefits are payable as early as age 60) or whose husband got reduced benefits-get less than 100 percent of the worker's PIA. The average benefit for aged widows is $310. Several factors affect the amount of benefits for family groups. A child's benefit is 50 percent of the worker's PIA if the worker is alive, and 75 percent if the worker is dead. Also, there is a limit on the monthly family benefit payable. When the worker is retired or deceased, the maximum family benefits range in amount from 150 percent to 188 percent of the worker's PIA. If the worker is disabled, the maximum family benefits range from 100 percent of the workers PIA (in the case where no supplemental benefits are paid) to 150 percent of the PIA. Under the automatic provisions in the law, once the worker becomes eligible for benefits, the family maximums are increased by the same percentage as benefits are increased. The benefit for a dependent parent of a deceased worker is 82.5 percent of the worker's PIA if there is only one parent eligible for the benefits; if both parents are eligible, each receives 75 percent of the worker's PIA. See page 30 of this chapter for an explanation of primary insurance amount (PIA). I Initial benefits as percent of final earnings. The wage levels for low and average earners are adjusted annually as general earnings levels rise. The Chart 2 shows the replacement rates the proportion of earnings that will be replaced by social security benefits for workers at different earnings levels retiring at ages 62 and 65 in 1985 under the provisions of the 1977 Social Security Amendments. These replacement rates reflect the progressive nature of the benefit formula-the higher one's earnings, the lower the replacement rate. They also show replacement rates for workers who choose to retire before age 65 and collect actuarially reduced benefits. Replacement rates are usually defined as the percentage of final year earnings that benefit amounts replace. If replacement rates are defined as a percentage of the average indexed monthly earnings (AIME), the same progressive pattern for replacement rates would emerge but they would be generally higher. For example, all other things being equal, the initial benefits for the worker with career average pay, retiring at age 65 in 1985 would represent 57 percent of AIME compared with 41 percent of final year earnings. For the career maximum earner the initial benefit represents a replacement rate of 47 percent of AIME compared with 24 percent of final year earnings. 7 See page 30 of this chapter for an explanation of average indexed monthly earnings Chapter 5 IS SOCIAL SECURITY COVERAGE DESIRABLE? The decision of whether or not to leave the social security program deserves serious consideration. Too often it is a decision made in haste or for the wrong reasons. Since the negative effects of leaving the program may not be felt for 30 years or more, but there may be an immediate increase in take-home pay, many workers feel that the decision to terminate social security coverage has no consequences, except a positive financial one. Obviously, this is not the case. The committee is deeply concerned about the effects an unwise decision may have on the worker and his or her family. In most cases, the committee urges a conservative approach—if in doubt about the decision, don't leave the program; State and local government employees under social security always have the option of terminating that coverage after it has been in effect at least 5 years. However, once social security coverage is terminated, the law prevents groups from ever regaining that coverage. In order to help State and local workers make a decision about social security coverage that is appropriate for them, we have divided the issue into arguments for and against social security coverage. Naturally, in any discussion about terminating social security coverage, one must evaluate the relative merits of social security and other plans. Since this is such a large topic, the committee has included, as separate sections of this paper, guidelines to help workers evaluate an alternate plan and a discussion of the value of social security protection (see chapters 4 and 7). It is difficult to treat public employee retirement systems (PERS) as a group, since each system was established independently by an individual government for its own employees. However, the provisions of public employee retirement systems do display some patterns. Strong public employee unions have produced similar protection for most workers. Approximately 72 percent of State and local government employees are now covered by both a staff plan-that is, a pension plan sponsored at the State or local level-and the social security program. Almost half the workers belong to large general public employee retirement plans, and many other workers are concentrated in plans for teachers or public safety personnel (police and firefighters). These patterns of protection permit description of "typical" plans and their provisions. In discussing the provisions of typical public plans, the committee has drawn heavily from the "Pension Task Force Report on Public Employee Retirement Systems," done by the U.S. House of Representatives, Committee on Education and Labor (95th Congress, second session) and "The Desirability and Feasibility of Social Security Coverage for Employees of Federal, State, and Local Governments and Private Nonprofit Organizations," a report issued by the Universal Social Security Coverage Study Group in March 1980. THE CASE FOR SOCIAL SECURITY VALUE OF SOCIAL SECURITY Most of the important arguments for social security coverage derive from the value of the program. While a more complete discussion of the value of social security is contained elsewhere in this paper, this chapter is designed to define the ways in which social security is superior to most public employee retirement systems. It is clear that the value of social security is often underestimated. A survey conducted by Peter D. Hart Research Associates, Inc., helps bear this out. That survey, of 1,549 individuals, done at the request of the National Commission on Social Security, was designed to produce an accurate cross section of the adult population of the United States at the present time. Here are a few of the findings: "Nine out of ten nonretired Americans expect to receive social security in retirement, and 60 percent expect it to be a major source of retirement income." However, the report also states that: "Among those already retired, 75 percent find it to be a major source of income. Only among nonretirees with family income over $25,000 is social security overshadowed by other sources of expected retirement income." It is interesting to note the difference in the percentage of nonretired Americans who expect social security to be of vital importance in retirement, and the percentage of Americans already retired who have found it to be a major source of income. While this is subject to varying interpretations, it may indicate that a sizable percentage of nonretired Americans underestimate the value social security will have. during their retirement years. For many Americans, retirement benefits are the only ones that come to mind in connection with the social security program. If the value of these benefits is underestimated, it follows that other aspects of the program, such as disability and health insurance, may be even less appreciated. In fact, many groups told the committee that they could do better" by opting out of the social security program in order to join another plan, or by investing the same amount of money that would go to social security into private investments. Many voiced the opinion that both of these alternatives would allow them to obtain superior protection, or gain the same protection at a lower cost. The committee questions both of these beliefs. As we have already seen, the value of social security protection is often underestimated. Furthermore, the administrative costs of the old-age, survivors and disability insurance, and medicare program are less than 2 percent (for fiscal year 1979). It would be difficult, if not impossible, for a smaller plan to match social security for value of the protection offered or cost of operation. An independent analysis of the cost of duplicating social security coverage for Alaska's State employees estimated it to be just over 22 percent of payroll. Further, the report, prepared in 1976 by William Mercer, stated the plan "would be extremely difficult |