Symposium on education systems transformation for and through inclusive education

LIVE

Symposium on education systems transformation for and through inclusive education
Sections

Commentary

Modifying the interaction between the Social Security and SSI programs would benefit low-income retired and disabled workers

Social security card and money
Shutterstock / zimmytws

Executive summary

The current interaction between the Social Security and Supplemental Security Income (SSI) programs is unfair to low-income workers. SSI provides monthly payments to people with disabilities and older adults who have little or no income or resources. A primary principle of the Social Security program is a strong benefit-contribution link while the SSI program’s primary goal is to ensure that there is a floor on the income of older adults and individuals with disabilities. Yet, a beneficiary receiving both Social Security and SSI benefits can have income substantially below the poverty level even after accounting for these payments. Under current law, after applying a $20 disregard of Social Security benefit, the SSI benefit is calculated by subtracting the Social Security benefit amount from the SSI benefit. Essentially, there is a one-dollar reduction in the SSI benefit for each dollar of Social Security benefit received.

Consider a low-income worker who receives a small SSI benefit. The worker has paid over $56,000 in payroll taxes on a lifetime of earnings and gets just $20 per month more in total benefits than the SSI federal benefit rate (FBR). The fact that the low-income worker with significant participation in the workforce has paid a sizable amount of taxes into the Social Security trust fund and receives little additional benefit relative to the FBR is a contradiction to two key social insurance principles — the earned income principle and horizontal equity. We argue that the low-income worker should get back approximately the amount they paid in Social Security taxes, adjusted for inflation. To achieve this goal, we propose raising the current $20 monthly disregard of Social Security benefits to $60 and applying a 40% disregard of remaining Social Security benefits when calculating the SSI benefit amount. This policy would enhance the well-being of many low-income workers and maintain the key principles in both programs.

Introduction

This brief examines the interaction between the Social Security and SSI programs – two of the most important social safety net programs in the country. We argue that the total benefit amount for low-income retirees and disabled workers receiving support from both programs is antithetical to key principles of social insurance. This issue brief explains how the interaction negatively impacts low-income workers who receive Social Security and provides a solution. In a forthcoming longer paper, we will propose other changes to federal programs that will reduce poverty among older adults. Namely, in SSI, we will propose increasing the maximum federal benefit amount, changing asset limits, eliminating the in-kind support and maintenance requirements, and increasing participation rates. Recently published work proposes reducing premiums for low-income Medicare beneficiaries. Together, these policy changes will greatly improve the economic security and well-being of many lower-income older adults – regardless of receipt of Social Security benefits.

An overview of Social Security

Signed into law by President Roosevelt in 1935, the Social Security Act created a social insurance program designed to strengthen economic security for older Americans by providing benefits to retired workers aged 65 or older and their dependents. Today, the Social Security program pays monthly benefits to 66 million retired and disabled workers, their dependents, and their survivors – about 1 in every 5 U.S. residents. Most of these beneficiaries are older adults, although one-fifth of the 66 million people received Social Security Disability Insurance (SSDI) or were survivors of deceased workers. In January 2024, the average monthly benefit for retired workers was roughly $1,900. Social Security is primarily funded by a 12.4%  payroll tax on earnings.

An overview of Supplemental Security Income

The Supplemental Security Income program was created in 1972 with bipartisan support in Congress and the Nixon Administration. It established one federal program to provide an essential income safety net for low-income older adults and people with disabilities using a consistent national eligibility standard. The program replaced an array of existing state, local, and federal programs including aid to older adults, aid to the blind, and aid to the permanently and totally Disabled.

The SSI program establishes a maximum monthly FBR, and thus sets a floor on the income of older adults. This floor is indexed to inflation yet is an ever-declining share of average Social Security benefits, as wages have increased faster than prices over time. Beneficiaries can also be individuals with limited income and resources who have a qualifying disability, or children with disabilities. To be eligible for SSI as an adult, a person must be age 65 or older or unable to do substantial work due to a prolonged health condition and have low income and assets. The SSI program is one of the most important federal sources of income assistance to low-income people in the United States, assisting 7.5 million beneficiaries per month in 2022 at an annual cost of $57 billion. SSI functions in tandem with Social Security. However, SSI is financed by general revenues, not by the Social Security payroll tax.

The interaction between Social Security and Supplemental Security Income benefits

Many people who are eligible for SSI are also entitled to Social Security benefits. Overall, 33% of SSI beneficiaries also receive Social Security benefits. In 2022, this amounted to about 2.5 million retirees and disabled workers receiving both SSI and Social Security. SSI benefits based on age begin at 65, therefore, individuals taking early retirement Social Security at 62 through 64 are not eligible for aged-based SSI until they reach 65.

The SSI benefit amount for an individual who also receives Social Security is calculated by disregarding an unindexed $20 from the individual’s Social Security benefit. After the $20 disregard is applied, there is a one-dollar deduction in SSI benefits for each dollar of an individual’s Social Security benefit.

How does the interaction between Social Security and Supplemental Security Income under current law impact low-income workers?

Current law considers the Social Security benefit primary. If the Social Security benefit is too low, a qualifying individual’s overall payment may be raised with the addition of SSI benefits. This can result in someone with no earnings, a low earnings history, or a work history that is not recognized by Social Security benefits receiving the same total combined income from SSI and Social Security as someone who makes roughly $1,000 a month once they reach age 65 – even though the former individual has at most a small Social Security benefit, and the latter has a substantial Social Security benefit. We note that there are many reasons why an individual may not receive Social Security benefits – none of which make an individual more or less deserving of safety net benefits. While this issue brief focuses on changes to the interaction between Social Security and SSI, as mentioned in the introduction of this brief, broader reforms will be discussed in a forthcoming paper that will improve the economic security for many more low-income older adults.

Regardless, a concurrent beneficiary receiving Social Security and SSI who makes $1,000 a month has engaged significantly in the workforce and made sizeable contributions in taxes into the Social Security trust funds over time. Consider this key question: How much payroll tax might a worker pay and only get $20 per month extra above the maximum SSI payments due to the current Social Security disregard?

To answer this question, take a worker who receives a Social Security benefit that puts them on the cusp of eligibility for SSI benefits. Effective January 1, 2024, the FBR is $943 for a single individual, which for the purpose of this calculation is also their monthly Social Security benefit. To calculate the amount of payroll tax paid, we first calculate the worker’s average indexed monthly earnings (AIME). If this worker retires at 65, two years before the normal retirement age of 67 and the first year an older adult is eligible for age-based SSI, the AIME that yields a Social Security benefit of $943 is about $1,200. We assume that this worker retired in 2024 and had earnings in the 35 years before the AIME is calculated. Using that AIME to calculate lifetime tax burden, the low-income worker paid over $56,000 on nominal earnings over their years in the workforce.

The interaction between Social Security and Supplemental Security Income is at odds with key principles of social insurance

In 1961 in an address on the value of social insurance and the role it plays in preventing economic insecurity, Robert Ball, Commissioner of Social Security under three presidents, outlined core principles of social insurance that have governed the provision of Social Security. Excerpted from the speech, Ball highlights that “social insurance is based on the concept that security for the individual should… grow out of [their] own work” — meaning a worker earns their future economic security from social insurance while currently engaging in the workforce. This encapsulates the earned income principle, a core pillar of the Social Security program, which asserts the worker should receive social insurance benefits later in life commensurate with, and related to, the amount of their earnings and taxes paid. Social Security does just this, as benefits received are based on the worker’s earnings history. The more earnings on which taxes are paid results in a greater benefit when retired or forced to stop working due to a disabling condition.

However, having a work history that results in receiving Social Security reduces the amount of benefit available through SSI. As previously described, there is a dollar reduction in the SSI benefit for every dollar received in Social Security benefit. This interaction is unfair to the low-income worker, as it contradicts the concept of the earned income principle. If the low-income worker does not earn enough to receive more than the $963 in monthly benefit from Social Security and SSI ($943 FBR plus $20 Social Security disregard), this worker will have paid a considerable amount of taxes on earnings over their lifetime. However, because of the dollar-for-dollar reduction, the low-income worker gets essentially the same monthly benefit as they would if they were only relying on the safety net FBR provided by SSI. Their contribution to the Social Security trust fund is essentially ignored.

Another principle of social insurance, horizontal equity, holds that taxpayers who have the same income should pay the same amount in taxes. A similar logic can be applied when considering the fairness of the Social Security-SSI interaction. Given that Social Security insurance is meant to reward and be commensurate with work history, it is warranted that low-income workers who have paid considerable payroll taxes are able to keep more of their earned Social Security benefit, and therefore receive additional benefits relative to the SSI FBR.

Highlighting the interaction between Social Security and SSI underscores that it is at odds with the programs’ fundamental intentions. The purpose of SSI is to provide monthly benefits to older Americans or individuals with disabilities who could not earn enough during their lifetime to escape poverty. One of the core purposes of Social Security is to provide a continued income to workers after retirement. Although these programs overlap in their goals of supporting older Americans, ultimately, the basis of the Social Security program and the SSI program are not the same. Yet, the current dollar-for-dollar substitutability of SSI and Social Security implies that they are interchangeable.

A proposed solution

To support low-income workers with social insurance in a way that reflects their contributions to the workforce and history of paying taxes, changes must be made to how SSI and Social Security interact with one another. The goal of setting an income floor for retirees and disabled workers needs to be unified with maintaining Social Security’s benefit-contributions link. One way in which this can be achieved is changing the Social Security disregard applied to SSI. We propose increasing the current $20 disregard to $60, indexing the $60 for inflation, and adding an additional 40% disregard to the remaining Social Security benefits when calculating the SSI benefit. Figure 1 below depicts the SSI benefit received by an individual under our proposal compared to under the current SSI benefit structure, given their monthly income from Social Security.

Considering that the current disregard has not been changed since the creation of SSI, the proposed $60 portion of the disregard is a modest increase from the current $20. Adjusting for inflation, the $20 disregard established in the 1970s is equivalent to about $160 today. In addition to the fixed $60, introducing a disregard percent reflects the earned income principle more evidently, as a portion of benefits received are clearly awarded based upon the worker’s earnings history. The increased disregard provides additional support to all SSI beneficiaries as it is applied to any level of benefit received, whether that be a portion of or the full FBR. The percentage component of the disregard ensures that the worker receives disregarded benefits proportional to their tax contributions to the Social Security trust funds over their lifetime.

Disregarding a substantial percentage of Social Security benefits will be costly to the federal government but will improve the well-being of low-income retirees and disabled workers significantly. In 2016, more than half of older adult SSI recipients had family income below the poverty level. The incorporation of the disregard percentage ensures that low-income concurrent beneficiaries will see a gain in their benefits. This solution will make no one worse off. Expanding the disregard will also result in many more low-income retirees and disabled workers becoming eligible for Medicaid. Furthermore, given that low-income workers are a racially diverse group and people of color have faced higher rates of poverty than white people over time, our proposal is expected to have large positive impact for low-income retirees and disabled workers of color.

Implementing this proposed solution will allow low-income older adults to obtain additional income during retirement, as highlighted in Figure 1. Under the proposed solution, the low-income worker with a $1,200 AIME could expect to receive an SSI check that is about $390 more than under current law. Over the worker’s remaining life expectancy, the 40% disregard returns approximately the lifetime tax paid into the trust funds. Recovering taxes is a modest accumulated benefit, as we are not proposing that these taxes be adjusted for interest. Low-income workers pay a significant amount of taxes over their lifetimes, which places a burden on their financial well-being prior to reaching age 65. In retirement, their combined benefits from SSI and Social Security should reflect these taxes paid.

Conclusion

Today, a beneficiary receiving both Social Security and SSI benefits can have income substantially below the poverty level. Furthermore, the dollar-for-dollar offset fails to recognize the contributions a concurrent beneficiary has made in taxes into the Social Security trust funds. Workers who have contributed to Social Security and become ensured for benefits should be able to retain more of the Social Security benefit they earned without losing access to SSI. It is incredibly important that the work of older adults and disabled beneficiaries be rewarded, especially for those living in poverty or near poverty. To remedy this interaction between Social Security and SSI, we propose increasing the current $20 Social Security disregard to $60, indexing the $60 to inflation, and adding an additional 40% disregard of remaining Social Security benefits. For the average low-income worker in the lowest quintile of the income distribution, the lifetime disregarded Social Security benefit amounts to $60,000, as opposed to only about $3,000 under the current $20 disregard. On average, the male worker will ultimately receive slightly less than the amount of payroll taxes paid, and the female worker will receive slightly more. Our proposal draws on the social insurance principles of horizontal equity and the earned income principle to make benefit amounts received by low-income workers on Social Security and SSI fairer, while reflecting the goals of both the SSI and Social Security programs.

Authors

  • Acknowledgements and disclosures

    The authors would like to thank Louise Sheiner for comments on an earlier draft of the piece.

    The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.

  • Footnotes
    1. Based upon standard public finance theory which assumes the employer payroll tax is borne by the worker. This amount is the sum of nominal taxes paid each year over 35 years and is adjusted for prices.
    2. AIME is established in the year a person turns 62 and assumes the worker continues working until age 65. The sum of earnings that yields a $1,209 AIME is just over $500,000. Low-income workers have a variety of work histories. The amount of earnings could vary somewhat depending on the work history – larger if the worker started their career earlier and smaller if started later. Regardless, the AIME of $1,209 is the key determinant of the tax burden. In our particular example, we assume that the worker had a steady stream of income over the 35 years. Every year of earnings can be un-indexed to calculate nominal earnings. Applying the OASDI tax rate to these nominal earnings, lifetime tax paid on nominal earnings sums to about $42,000. After adjusting for inflation, the taxes paid on nominal earnings is $56,750 in current dollars.
    3. Robert Ball was the Deputy Director of the Social Security Administration when he made this address.
    4. Many concurrent Social Security and SSI beneficiaries became eligible for benefits based on disability. These workers contributed to SSDI and received the program’s social insurance protection due to experiencing a serious work disabling condition. While these workers contributed for a shorter period to Social Security, they are entitled to a comparable benefit to a retiree based on their work history.
    5. In many states, SSI recipients are automatically eligible for Medicaid without needing to apply for the program. Holding states’ current Medicaid eligibility requirements constant, expanding the disregard will result in more individuals receiving SSI benefits, and therefore becoming automatically eligible for Medicaid in these states.
    6. Based on life expectancy at 65 for workers in the lowest income quintile.