The Interaction of Public Retirement Income Programs in the United States

Abstract

Around 1.2 million elderly individuals currently receive income through the Supplemental Security Income (SSI) program, a welfare program intended to provide income assistance to individuals age 65 or above whose earnings histories do not support an adequate retirement benefit under the Old-Age Insurance (OAI) component of Social Security. In this paper we explain how the two programs interact and present basic empirical evidence on how this interaction affects the timing of a first OAI claim, which may take place as early as age 62. We are fortunate to have unusually complete data on individuals’ experiences with both the OAI and SSI systems, due to access to administrative data from the Social Security Administration (SSA) matched to individuals in the Surveys of Income and Program Participation (SIPP) by special arrangement. Our essential point is that SSI creates incentives for individuals to claim their OAI benefits earlier than they otherwise would. Two factors underlie this. First, the availability of an “early” (i.e., pre-age-65) retirement option in OAI makes SSI participation itself more attractive to those who are OAI-qualified. The ability to combine early (OAI) retirement with later SSI participation enhances the value of participating in SSI. Second, the SSI benefit computation formula creates strong financial incentives to claim OAI as early as possible, given a person plans to enter SSI and is qualified for OAI. Both of these phenomena are generated by the form of the SSI benefit formula. As is typical in a welfare program, other income sources are subject to a heavy implicit tax (there is also an asset limit for SSI eligibility which we ignore in the interests of simplicity; see Neumark and Powers [1998] for an empirical analysis of this feature). In general, monthly SSI benefits are reduced dollar-for-dollar with other income beyond the first $20. Two-thirds of SSI recipients receive OAI income (almost none receive private pension income or earnings), so most face a 100-percent marginal tax rate on their Social Security retirement benefits due to participation in the SSI program. Theory predicts that this implicit confiscatory tax imposed by SSI on OAI benefits (above $20) discourages work prior to turning age 65, to the extent that people work to enhance postretirement income (Neumark and Powers, 2000). The constraint on acting upon the incentives to reduce labor supply prior to age 65 is the maintenance of current consumption. Clearly, this may be a binding constraint for the sorts of lifetime-poor individuals who participate in SSI in old age. Now consider that people may claim OAI benefits as early as age 62. Early OAI benefits enable prospective SSI recipients to curtail their labor supply in the years prior to SSI participation, enhancing the value of the SSI program from a lifetime-utility perspective. While in the absence of SSI the actuarial reduction in OAI benefits for early retirement might discourage early claims, this is not the case under SSI. When SSI determines the government old-age transfer, actuarial reductions are effectively lifted at age 65, implying that there are no long-run adverse financial consequences of making an early first old-age insurance (OAI) claim. In fact, the rules strongly encourage future SSI recipients to claim OAI early: if they * Powers: Institute of Government and Public Affairs and Department of Economics, University of Illinois, 1007 W. Nevada St., Urbana, IL 61801 (e-mail: epowers@ uiuc.edu); Neumark: Public Policy Institute of California, 500 Washington St., Suite 800, San Francisco, CA 94111, and National Bureau of Economic Research. This research was supported by grants from the U.S. Social Security Administration to the Michigan Retirement Research Center and the Center for Retirement Research at Boston College, and NIA grant 1-R01-AG17619-01A2. The opinions and conclusions are solely those of the authors and should not be construed as representing the opinions or policy of any agency of the Federal Government, the Centers, or the Public Policy Institute of California. The authors thank Sarah Jackson for excellent research assistance and Alison Del Rossi for comments. 1 People may also enter SSI through disability. We restrict our attention to the aged component.