Benefit policy spans the spending and tax programs that increase individual income. The two main types of programs on the spending side are social assistance programs and social insurance programs. Social assistance programs are typically financed through general revenue, take the form of cash or in-kind benefit, and are directed at low-income, low- and middle-income, or otherwise economically insecure populations. Social insurance programs are typically contributory programs in which individuals earn eligibility through insurance contributions—made by them or on their behalf—and then later claim benefits when experiencing an insured event.
The three main types of benefits on the tax side are tax credits, tax deductions, and tax exemptions. These tax policies—designed to achieve a social purpose—are broadly grouped together as tax expenditures. This report differentiates tax policy from tax expenditure policy and focuses on the latter. Tax policy encompasses the rates applied to taxable income from which an individual’s or entity’s tax liability is calculated. Tax expenditure policy relates to exceptions that reduce tax liability to promote certain social outcomes.
Two key tensions lie at the heart of benefit policy: 1) determining who should benefit and when, while considering how to prevent or ameliorate economic insecurity but not discourage work and economic self-sufficiency; and 2) determining the cost of providing benefits to a given population to prevent or ameliorate economic insecurity, and whether a more cost-effective way to do so is available.
|Social Assistance Programs
|Improve eligibility design for means-tested spending programs
← → Equity Policy
|1. End the use of asset tests in eligibility for those means-tested programs in which they remain.
2. Raise the asset-test threshold and design a phase-out of benefits when the asset test is met.
3. Prohibit the use of behavior disqualifications in all means-tested programs.
4. Allow more documented immigrants to access means-tested programs.
|Update Supplemental Nutrition Assistance (Food Stamps)
||1. Automatically increase SNAP benefits for families with children during summer months while school is not in session.
2. Expand allowable purchases and enable families to afford a more nutritious diet.
3. End the time limit for nondisabled adults without dependents.
|Update Supplemental Security Income (SSI)
||1. Increase the monthly SSI benefit to at least the federal poverty level.
2. Update the earned and unearned income disregards.
3. Eliminate or reform the one-third benefit reduction for “in-kind support and maintenance.”
4. Extend the benefit phase-out for earnings to more effectively support beneficiaries attempting to return to work.
5. Eliminate marriage penalties.
6. Extend SSI eligibility to qualifying residents of U.S. territories.
|Create a universal income base (UIB) for all adults *
← → Equity Policy
|1. Create a UIB for all adults.
2. Subject the UIB to income taxation.
3. Exempt the UIB from the income amount used to determine eligibility for other programs.
4. Index the UIB to growth in the average or median wage.
|Social Insurance Programs
|Expand Social Security Old-Age, Survivors, and Disability Insurance (OASDI)
||1. Update the special minimum benefit and index it to the average or median wage.
2. Increase all benefits (progressively) by increasing the rate at which first dollars of earnings are replaced.
3. Increase benefits for the oldest beneficiaries.
4. Eliminate the five-month waiting period for disability insurance benefits.
5. Eliminate the 24-month waiting period for Medicare coverage following receipt of disability insurance benefits.
6. Improve work incentives for individuals receiving disability benefits by increasing substantial gainful activity thresholds and phasing out benefits more gradually.
7. Address program needs of people receiving disabled adult child (DAC) benefits.
8. Change the calculation of spousal and widow(er) benefits.
9. Restore the student benefit for college-age children.
|Improve OASDI financing
||1. Increase the Social Security insurance contribution (“FICA”) rate.
2. Increase or eliminate the maximum taxable wage base for Social Security.
3. Treat at least some 1099 workers more like W-2 workers for purposes of Social Security contributions.
4. Dedicate a new source of progressive revenue to Social Security.
|Reform Unemployment Insurance (UI)
← → Labor Policy
|1. Overhaul the data-reporting architecture and create new performance measures for states regarding benefit levels, eligibility, and receipt rates.
2. Implement federal standards for benefit levels, eligibility requirements, state tax rates, and state tax bases.
3. Explore the cost and benefits of fully federalizing the UI tax and benefit systems.
4. Bring independent contractors and the self-employed permanently into the UI system.
5. Include Short-Time Compensation in every UI system.
|Improve caregiving supports
← → Equity Policy
|1. Establish a state-administered paid family and medical leave system under federal guidelines.
2. Create a federal paid family and medical leave program.
3. Establish a state-administered long-term care system under federal guidelines.
4. Create a federal long-term care program.
5. Significantly increase investments in childcare.
|Update the Earned Income Tax Credit (EITC)
||1. Increase benefit size and eligibility for workers without dependents at home.
2. Increase benefit size for workers with dependents at home.
3. Phase the credit in faster.
4. Allow workers without children at home ages 19–24 and those ages sixty-five and older to claim the credit.
5. Allow independent students to claim the credit.
|Update the Child Tax Credit (CTC)
||1. Increase the value of the CTC per child.
2. Provide a larger credit to families with very young children.
3. Remove the minimum-earning threshold and make the credit fully refundable.
4. Pay out the CTC monthly.
5. Exclude the refundable credit from income in determining transfer program eligibility for means-tested programs
|Implement a negative income tax (NIT)
||1. Create a negative income tax (NIT) indexed to the average or median wage.
2. Update the EITC to harmonize with the NIT.
|← → This symbol appears throughout the policy options tables in cases where a policy fits well under multiple pillars.
*Create a universal income base (UIB) for all adults
The first type of benefit policy is social assistance programs, sometimes called transfer programs, which provide cash and in-kind benefits to households below specified income levels, paid out from general revenue. The programs for which this report discusses specific policy options are:
- Supplemental Nutrition Assistance (SNAP); and
- Supplement Security Income (SSI).
Low-Income Home Energy Assistance Program (LIHEAP), Medicaid, and Temporary Assistance to Needy Families (TANF) have overlap with SNAP and SSI recipient populations, and this report discusses these programs in that limited regard.
Improve eligibility design for means-tested spending programs
A program is said to be “means tested” if the program conditions eligibility for benefits on having low enough income and, in some cases, assets. Demonstrating eligibility for benefits often requires more than simply proving that one’s income is sufficiently low.
First, most programs are intended for specific populations within the broader category of low- to middle-income individuals. For example, SNAP benefits are intended to supplement the food budget of low-income families. In practice, benefits are often targeted toward families with dependents, people with disabilities, adults over 49 years of age, and low-income people ages 18–49 who are working.,
SSI is intended for low-income elderly, blind, and disabled individuals. Directing benefits to specific groups allows policy makers to target populations deemed most in need and maintains strong work incentives for those deemed most capable and apt for labor market participation.
Second, historically, federal means-tested programs had asset as well as income tests. These asset tests were designed to ensure that only those with the least resources would qualify for benefits. Unfortunately, asset tests also discourage those receiving the program’s benefits from saving, or they create incentives for those trying to use the program to hide or dispose of their assets. Over time, the deleterious consequences of asset limits have been recognized, and many programs have eliminated asset tests or greatly reduced their use, but some asset tests remain. SSI has an asset test determined solely by the federal government. SNAP and TANF have asset tests set by the federal government, but states can remove or amend them, and many have done so.
Third, in the 1996 welfare overhaul legislation, the federal government issued two sweeping ineligibility measures for federal social assistance programs: Any individual with a felony drug conviction and certain categories of immigrants would no longer be eligible for benefits. In the time since, states have moved in two directions. Many fully or partially opted out of the felony restrictions, and the federal government has eased, but not eliminated, the immigrant restrictions. Some states, however, have added other behavior disqualifications such as drug tests, particularly in TANF.
1. End the use of asset tests in eligibility for those means-tested programs in which they remain. This change would eliminate remaining state assets tests in SNAP and Medicaid and end federal and state use of asset tests in SSI and LIHEAP.
2. Raise the asset-test threshold and design a phase-out of benefits when the asset test is met. Rather than prohibit the use of asset tests, this policy would improve their design. In SSI, for example, asset tests limits are $2,000 for a person and $3,000 for a couple; the limit for couples is 1.5 times the limit for individuals if both are recipients. These limits were set in 1984, fully phased in by 1989, and have since greatly eroded in value. An increased asset threshold could be accompanied by a benefit phase-out, assuming the administrative feasibility of such a policy.
If the program sets a benefit “cliff,” in which an additional dollar of savings results in a total loss of benefits, recipients are encouraged to keep savings below the cutoff. A phase-out softens this disincentive. Policy makers should think carefully about what sort of phase-out best incentivizes asset accumulation and the administrative difficulties of closely tracking asset levels.
3. Prohibit the use of behavior disqualifications in all means-tested programs. This policy would reverse the federal drug felony ban and prohibit states from enacting similar or related policies.
4. Allow more documented immigrants to access means-tested programs. This policy would reverse the immigrant disqualification from certain benefits and prohibit states from enacting similar or related policies. Some states have taken steps in this direction; this policy would remove such disqualifications as a federal rule. One of the consequences of immigrant restrictions is to deter eligible individuals from applying for benefits. Many individuals live in mixed-status families, where the immigration status varies by person, and immigrant disqualification leads to a “chilling” effect, causing eligible immigrants and citizens to be reluctant to apply.
Update Supplemental Nutrition Assistance
SNAP benefit amounts are based on the Thrifty Food Plan produced by the U.S. Department of Agriculture. Total SNAP benefits awarded to a household vary by the number of people in it.
Prior to the enactment of the American Rescue Plan Act of 2021 (ARP) and the COVID-19 relief package enacted in December 2020, maximum SNAP benefits for an individual in 2021 were set to provide $204 per month and decline per individual with each additional family member. This benefit calculation came out to $6.71 per day for a household of one receiving maximum benefits. For a household of five, the maximum benefit drops to $5.31 per day per individual.
With the enactment of the ARP, the 15 percent increase in SNAP benefits enacted by the December 2020 COVID-19 relief package extended through September 2021. Furthermore, many states provided “emergency allotment” benefits of at least $95 per household per month through the early summer of 2021.
Researchers have found that families receiving SNAP vary their nutrition and caloric intake throughout the month as they receive, use, and then wait for additional benefits. This monthly fluctuation in food security has been shown to have a wide range of negative effects, from reducing child health to adversely affecting children’s academic performance.
Effective October 2021, the Thrifty Food Plan—on which SNAP benefits are based—was reevaluated by the USDA, resulting in a 21 percent increase in maximum SNAP benefit amounts and a 27 percent increase in the average SNAP benefit. This change comes out to a $12–$16 increase per person per month. The change will go a long way in reducing the “SNAP shortfall,” which was estimated to be $10–$20 per person per month as of 2015.
Eligibility for SNAP is a three-part test of gross income, net income, and, in some states, assets. Gross income must be at or below 130 percent of the poverty line (except for households with an elderly member), net income must be at or below 100 percent of the poverty line, and in ten states liquid assets (such as cash in a bank account) must be below a certain amount, typically $2,250 for a household without an elderly or disabled member. These income and asset tests often are not required, however, if individuals have “broad-based categorical eligibility” because they are currently enrolled in TANF, SSI, or state-run general assistance programs. In addition, individuals without dependent children who do not have a disability are only eligible for three months of SNAP while unemployed or working less than twenty hours a week in a three-year period, unless they are enrolled at least half-time in an approved work or training program or live in an area of elevated unemployment and their state has secured a waiver from the time limit for the area.
1. Automatically increase SNAP benefits for families with children during summer months while school is not in session, beyond 2021. For families whose children are on free and reduced meals at school, their food budget needs increase in the summer. One proposal is to increase SNAP benefits by 50 percent for the summer months.
The ARP provided corresponding benefits to families for any meals missed by children when schools were closed, including during the summer months of 2021.
2. Expand allowable purchases and enable families to afford a more nutritious diet. SNAP benefits may be used to purchase most food items, except prepared foods for immediate consumption and hot foods (anything like takeout). Increased flexibility in spending choices would make SNAP benefits more like cash, and in doing so better offset the costs of nutrition for low-income households.
This proposal would expand the allowable foods and provide further incentives for healthy food purchases.
3. End the time limit for nondisabled adults without dependents. Currently, adults ages 18–49 who do not have dependents and do not have a disability that qualifies them for Medicaid or SSI are subject to a three-month time limit on receiving SNAP during any three-year period unless they report twenty hours of work per week. Eliminating SNAP’s time limit would enable unemployed and underemployed workers to continue to receive food assistance whether or not they are able to find steady work.
Update Supplemental Security Income
SSI is a cash benefit awarded to individuals with very low income and assets who are elderly, blind, or disabled. In 2021, the maximum federal SSI benefit for an individual was $794 per month.
As of 1980—six years after its initial implementation—the majority of recipients were ages sixty-five and older; today, most SSI recipients are younger than sixty-five and disabled. For almost 60 percent of recipients, SSI benefits are their only source of income. Current benefits are calculated as a monthly amount. Monthly unearned and earned income reduce that monthly benefit, after initial disregards.
1. Increase the monthly SSI benefit to at least the federal poverty level. The current maximum monthly federal benefit is well below the poverty level. One proposal is to increase SSI benefits to the federal poverty level. A level increase in federal SSI benefits and continued annual inflation adjustments—currently achieved using the CPI-W, the price index for urban wage earners and clerical workers—would improve living standards for some of the most financially insecure populations and keep benefits at a relevant level over time.
2. Update the earned and unearned income disregards. In general, SSI benefits phase out as a person’s income from other sources increases above certain thresholds. Currently, SSI recipients can receive a combined total of $85 per month in earned and unearned income without experiencing a reduction in benefits. This proposal would increase both the earned income and unearned income disregards. One proposal is to update both disregards annually with inflation. Another proposal would tie the disregards to a multiple of the minimum wage for a full-time worker. For instance, an allowance of 160 (hours) times the minimum wage per month would allow four weeks of full-time work without benefit reductions.
3. Eliminate or reform the one-third benefit reduction for “in-kind support and maintenance.” Currently, SSI beneficiaries see meager benefits reduced by one-third if they are considered to be receiving help paying for food or shelter. Eliminating this one-third reduction would increase benefits for many of the most financially insecure SSI beneficiaries.
4. Extend the benefit phase-out for earnings to more effectively support beneficiaries attempting to return to work. Currently, for every dollar of earned income above a threshold amount, an SSI recipient loses 50 cents in benefits, a 2:1 ratio. An extended benefit phase-out would change the benefit loss to a 4:1 or 5:1 ratio to encourage and permit work.
5. Eliminate marriage penalties. Currently couples in which both individuals are SSI beneficiaries see benefits reduced by 25 percent if they marry. SSI beneficiaries who marry non-SSI beneficiaries can lose benefits altogether due in large part to the program’s asset limits, which include spousal assets. Eliminating the benefit reduction for married couples receiving SSI and eliminating or increasing asset limits would extend marriage equality to SSI beneficiaries and better assure that the most financially insecure populations have a meaningful, steady stream of income.
6. Extend SSI eligibility to qualifying residents of U.S. territories. Under current law, residents of American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands are ineligible for SSI, even if they are U.S. citizens or documented U.S. immigrants. Guam, Puerto Rico, and the U.S. Virgin Islands have programs that provide benefits to the same populations, but the benefits are small compared to what SSI would offer. American Samoa has no such programs. This option was proposed in the Build Back Better legislation of 2021.
Create a universal income base (UIB) for all adults
An adult cash benefit program would provide a modest but reliable amount of income to every adult each month, regardless of income, assets, disability status, criminal record, and the many other criteria often used to determine program eligibility in the U.S. This concept recognizes that the need for income stability and support extends beyond categories of individuals and that, for many individuals, periods of low or very low income happen sporadically. It also allows people to choose how to use their resources, without having to establish need or eligibility, and frees them from having to account to the government for how funds may be used. A universal cash benefit providing adequately for all individuals’ needs is not, however, financially feasible without major new revenue sources or rearranging the current safety net. In addition, very high benefits might raise concerns about work disincentives.
A cash benefit flowing to all adults creates the infrastructure for Congress to respond quickly to economic shocks that require relief—for example, increasing the UIB in regions affected by natural disasters or efficiently and quickly providing a stimulus during recessions. An alternative approach to a UIB, a negative income tax, is outlined later in this section in the context of tax credits.
1. Create a UIB for all adults. A universal cash benefit program would help individuals in current economic need and/or would support savings for future needs. The UIB would be a modest monthly amount to provide a floor but not meet, or be intended to meet, adequacy standards, such as $200 a month.
2. Subject the UIB to income taxation. Taxing UIB payments would “claw back” some of the benefit for higher income households. For example, when filing tax returns each year, individuals might be allowed to opt out of future UIB payments, transfer UIB payments to a savings account, or automatically transfer the UIB payments to a charity. The Alaska Permanent Fund operates similarly.
3. Exempt the UIB from the income amount used to determine eligibility for other programs. The benefit would not be counted as income for SNAP or SSI, for example. This exemption ensures that the payment adds to economic security and does not create perverse disincentives, as discussed in the context of other programs.
4. Index the UIB to growth in the average or median wage. Indexing the UIB payment would ensure that the benefit increases automatically each year.
The second type of benefit policy consists of social insurance programs, which provide benefits to workers who have earned eligibility for the program for themselves and their dependents through their prior work history. Unlike other types of benefit policy, including from the tax system, social insurance benefits are often financed from contributions (FICA, or Federal Insurance Contributions Act payments) maintained in separate trust funds.
Although the retirement benefit is often referred to as “Social Security,” that benefit simply addresses the most common risk that results in insured benefits. The other risks are death and disability. Another program of social insurance, created by the same 1935 legislation, is Unemployment Insurance. Workers’ compensation is not discussed here due to its unique existence as a purely state-run social insurance program. Since the National Commission on State Workmen’s Compensation Laws of 1972 gathered and issued its landmark report, however, calls to establish federal minimum standards have periodically been raised. Medicare was signed into law in 1965 as the country’s foundational social insurance program for healthcare.
Expand Social Security Old-Age,Survivors, and Disability Insurance
Individuals earn eligibility for Old Age, Survivors, and Disability Insurance (OASDI) by working in covered employment and making contributions that are deducted from their earnings, as authorized by the Federal Insurance Contributions Act (FICA). Their contributions are matched by equal contributions made by their employers. Earnings are subject to the contribution for Social Security up to a maximum, $142,800 in 2021. These earnings are used to calculate benefits.
Individuals born after 1959 have a statutorily defined full “Retirement Age” of sixty-seven years old. Benefits are calculated from their earnings history and are based on the highest thirty-five years of earnings. The formula is progressive, meaning that individuals with a lower lifetime income have a higher replacement rate than individuals with higher lifetime income. The last time Congress comprehensively addressed OASDI was in 1983. The last time Congress increased OASDI benefits was in 1972.
Although the benefit amount is a function of earnings, Social Security has minimum benefits and maximum family benefits. The so-called special minimum benefit provides a floor for people with a lifetime of very low earnings. The value of the special minimum has eroded significantly over time, however, since it is tied to increases in prices rather than wages, and prices tend to grow more slowly than wages. No new beneficiaries receive higher benefits from this minimum than from the regular formula; the last minimum benefit was awarded in 1998. The highest benefit is the benefit based on career earnings at the earnings cap; individuals receive the highest benefit if they earned at or above the cap for thirty-five years.
Social Security benefits are payable, as their own separate benefits, to a worker’s family, based on the worker’s earnings. Spouses, divorced spouses, dependent children, and, in some cases dependent grandchildren of retired or disabled workers, and the widow(er), divorced widow(er), or dependent children, and, in some cases dependent grandchildren and parents of a deceased worker may be eligible for benefits. The benefit amount for an auxiliary beneficiary is a percentage of what is labeled the worker’s “primary insurance amount” (PIA).
In addition to retired workers, survivors, and dependents, Social Security has three main types of beneficiaries with disabilities. Individuals who have worked previously and achieved insured status are eligible for disability benefits if they are no longer able to work due to a medical condition that is expected to last at least one year or result in death. Additionally, individuals with permanent disabilities that began before age twenty-two and have a parent with a sufficient work history are eligible to receive disabled adult child (DAC) benefits once their parent claims benefits. This group is a subset of survivors and dependents. A third group, widow(er)s with disabilities between ages 50–60, is eligible to receive benefits if the relevant disability began before or within seven years of a working spouse’s death. This group is also a subset of survivors and dependents.
Workers with disabilities who are awarded Social Security disability insurance benefits do not begin to receive those monthly benefits until five months after the date of the disability’s onset. They also receive Medicare, but only starting two years after the beginning of benefit eligibility. In December 2020, the average Social Security Disability Insurance worker benefit was $1,277 per month, or just over $15,000 per year.
Workers with disabilities receive Social Security disability insurance benefits until the worker recovers or dies, though once the worker reaches retirement age, the benefit is seamlessly converted to an old age insurance benefit of the same amount. Workers who earn enough to support themselves, an amount defined as “substantial gainful activity” (SGA),are not considered disabled for the purposes of receiving Social Security. Workers with disabilities receiving Social Security disability insurance benefits are allowed to earn over the SGA in specified circumstances, to encourage return to work efforts.
1. Update the special minimum benefit and index it over time to the average or median wage. As of 2012, 12.7 percent of retired worker Social Security beneficiaries and 23.4 percent disabled worker Social Security beneficiaries were living in poverty; secondary beneficiaries face high poverty rates as well. This policy would increase income security for low lifetime earners and adjust the minimum benefit annually based on the change in wages so that it would not erode in the future. An updated minimum benefit would also ensure more adequate benefits for survivors and dependents of workers with low lifetime covered earnings.
2. Increase all benefits (progressively) by increasing the rate at which first dollars of earnings are replaced. A worker’s PIA is calculated from a formula that is bracketed and progressive.“Bracketed” means that a replacement rate is applied to “brackets” of wages. “Progressive” means that the lower the wage’s bracket, the higher the marginal replacement rate. This formula might be amended to increase benefits disproportionately for workers with the lowest lifetime earnings by increasing the replacement rate and dollar amounts of the first bracket. This change would also ensure more adequate benefits for survivors and dependents of workers—especially those workers with low lifetime covered earnings.
3. Increase benefits for the oldest beneficiaries. This policy would add a flat dollar amount or percentage increase once beneficiaries reach age eighty or eighty-five in acknowledgement of the tendency for health care and caregiving costs to increase as one ages and the potential for savings depletion at later ages.
4. Eliminate the five-month waiting period for disability insurance benefits. This change would reduce the need for workers with disabilities to draw down savings and assets—if they have them—in the interim and eliminate a period of potential hardship if they do not.
5. Eliminate the 24-month waiting period for Medicare following receipt of disability insurance benefits. Workers with disabilities who receive Social Security disability insurance (SSDI) benefits by definition cannot engage in substantial gainful activity (and are therefore not accessing employer-sponsored insurance), have a preexisting condition, and are likely to have greater health care needs than a person without a disability. Insurance may be difficult to attain or afford, and out-of-pocket expenses may be unaffordable. Immediate Medicare eligibility would protect recipients of disability insurance benefits from these additional health and financial risks.
6. Improve work incentives for individuals receiving disability benefits by increasing SGA thresholds and phasing out benefits more gradually. If countable monthly earnings exceed the SGA threshold, Social Security disability benefits continue for nine months to avoid penalizing efforts to return to work. Even so, the current structure creates a benefit cliff that can disincentivize both part- and full-time work. In addition, workers with disabilities frequently experience changes in their conditions that may enable or limit access to work for periods of time. The 2021 SGA level employed by SSDI is $1,310/month ($15,720/year) for nonblind individuals and $2,190/month ($26,280/year) for blind individuals. SSI uses the lower SGA level for both blind and nonblind individuals with disabilities. A policy to improve work incentives might include a redesign of the benefit phase-out and a change to the SGA threshold.
7. Address program needs of people receiving DAC benefits. Some people with disabilities attain Social Security benefits through the work history of their parents. These individuals, also known as DAC beneficiaries, face key program design issues. The first is a marriage penalty. Unless a DAC beneficiary marries another DAC beneficiary, disability benefits typically end. This policy puts DAC beneficiaries in a difficult situation, where marriage may cost them key income as well as access to Medicare.
The second design issue is the work incentive. DAC beneficiaries who lose benefits due to earned income exceeding the SGA threshold may return to those benefits in the future if they are no longer earning above the SGA threshold and continue to have the qualifying disability. Individuals who would receive DAC benefits but for their parent having yet to claim Social Security benefits, however, will permanently forfeit their benefits and access to Medicare if they earn income above that threshold for even a short period prior to their parent claiming benefits. As such, people with disabilities receiving SSI who attempt to use the work incentives within SSI risk permanently losing the valuable support of the OASDI benefits and Medicare. This aspect of the law creates a major work disincentive for potential DAC beneficiaries.
8. Change the calculation of spousal and widow(er) benefits. The spousal benefit structure was designed in 1939 when most families had only a single earner. The spouse of a worker beneficiary is entitled to a benefit calculated from their own earnings and, if that amount is less than 50 percent of their spouse’s benefit, a spousal benefit that brings the total benefit up to that 50 percent level. Surviving spouses of deceased workers receive the higher of their benefit or their deceased spouse’s benefit. This formulation of the survivor benefit can result in the survivor in a couple with two equal earners experiencing a sharper decline in Social Security benefits than does the survivor of a single-earner couple. This change would increase benefits to survivors of dual-earning marriages by either 1) increasing the percent of their spouse’s benefit to which they are entitled or 2) entitling survivors to 100 percent of their spouse’s benefit altogether. These survivor benefits would supplement any individual benefits received by the widow(er). This policy would ensure that dual-earning households are not penalized relative to single-earning households.
Another possible change that would increase the economic security of some spouses—in practice, primarily women—would be to reduce the number of years of marriage required for someone to qualify for a spousal benefit and phase it out such that benefits vary with years of marriage up to a certain length. Currently that requirement is ten years, and it functions as a cliff.
9. Restore the student benefit for college-aged children. Prior to the 1981 repeal, child beneficiaries (receiving auxiliary benefits) were eligible for benefits through age twenty-two if they were enrolled in postsecondary education. Now they are eligible only through age nineteen, and only if still in high school. Restoring this more extensive benefit would increase income security for students with a parent who is no longer earning income in the labor market.
Unlike SNAP or SSI, funding for Social Security (the OASDI programs) comes exclusively from its own dedicated revenue streams: Social Security contributions, investment income, and dedicated revenue from treating some benefits as taxable income for federal income tax purposes. As a social insurance program, the employer-employee contributions, which are the primary source of dedicated revenue, along with the work on which the contributions are based, confer insured status. Only workers who have worked in Social Security–covered employment for a sufficient number of quarters of coverage are eligible for Social Security worker benefits, on which all auxiliary benefits are based. Social Security is “current funded,” meaning that, for example, 2022 benefits are paid (in part) by revenue from 2022 payroll taxes. Annual trustees’ reports project future trust fund income and outgo to ensure that resources will be available to meet future benefit obligations. Since about 1994, Social Security’s Trustees reports have projected that around 2035–2040, the combined OASDI trust funds will no longer have sufficient revenue and reserves to meet all beneficiary obligations. To restore Social Security to long-range actuarial balance, as well as fund the cost of expansions to OASDI, additional revenue must be secured, the cost of benefits must be reduced, or some combination of the two.
Social Security, for decades, took in more revenue than the cost of current benefits and associated administrative costs. These funds are kept in Social Security’s two trust funds as reserves where they are invested until needed. By law, the reserves must be invested in federal bonds backed by the full faith and credit of the U.S. Currently, the reserves of approximately $2.9 trillion are invested in U.S. Treasury bonds. The key date for Social Security’s shortfall is when the trust funds’ reserves are expected to be depleted, at which point then-current income will cover only around 75–80 percent of then-current expenses. Hence, most policy options for Social Security are expressed in relation to reserve depletion. The current projection for reserve depletion is 2035. Many options exist for restoring Social Security to actuarial balance, some of which involve reducing benefits. Since this report is focused on economic insecurity, the report does not discuss options that would reduce benefits and instead focuses on options to increase Social Security’s dedicated revenue.
1. Increase the Social Security insurance contribution (Federal Insurance Contributions Act, or FICA rate). The current Social Security FICA rate is 6.2 percent for employees and 6.2 percent for employers for a combined rate of 12.4 percent. This option would increase that rate. The Social Security Administration’s Office of the Chief Actuary (OACT) lays out ten options and their respective impacts on Social Security’s finances in the short and long terms. For example, if the 6.2 percent rates were increased to 7.9 percent, for a combined employer-employee rate of 15.8 percent, 101 percent of the projected shortfall would be eliminated.
2. Increase or eliminate the maximum taxable wage base for Social Security. Social Security contributions are levied on “covered” wages, which are wages that are below an annually indexed amount, called the maximum taxable wage base, and after that point wages are not subject to Social Security for either contributions or benefits purposes. In 1977, Congress increased the wage base and indexed it to the average increase in wages nationwide, with the intention of covering 90 percent of total wages paid nationwide. That 90 percent goal was reached in 1983 but has steadily declined since then because of increasing income inequality. That is, wages for the wealthiest have grown faster than average wages. Consequently, the current maximum covers only 83 percent of total wages nationwide.
This policy would increase or eliminate the cap; proposed options include removing the cap entirely, removing it on employers only, and increasing the cap to cover 90 percent of taxable wages. An additional option would phase out the cap over many years by starting with wages above a certain amount, such as $250,000 or $400,000. The amount of revenue raised by these options depends on specific design features, including how the higher wages are treated for benefit purposes. The OACT analyzes thirty-four options to carry out some combination of raising, eliminating, or slowly phasing out the cap, as well as restoring the maximum taxable wage base to cover 90 percent of total wages. For example, if the maximum taxable wage base were eliminated for contributions only, not benefits, then 73 percent of the projected shortfall would be eliminated.
3. Treat at least some 1099 workers more like W-2 workers for purposes of Social Security contributions. Individuals who are self-employed must pay both the employee and employer tax on earnings—the full 12.4 percent, though they deduct the employer portion from income for tax purposes. When income is paid from an employer to an employee, the employer must deduct the employee’s required Social Security contributions and transmit the amount, along with the employer portion, to the federal government. The employee portion transmitted is listed on an annual W-2, filed with the government. No withholdings for Social Security on income paid to nonemployees, including independent contractors, are made. The income is recorded on a 1099 form, which is transmitted to the government; a copy of which is also transmitted to the worker. Firms do not have to compensate independent contractors in the same way they do employees; they are neither subject to labor standards such as the minimum wage or overtime, nor does the employer have to pay taxes on their compensation. Requiring employers of 1099 workers to pay some Social Security, as they do for W-2 workers, is one way to reduce the incentives of employers to misclassify these two different kinds of workers. It might be a flat tax per 1099 issued, might vary based on the total per person paid via 1099, or the number of 1099 forms the firm issues, or might be simply to treat 1099 workers identically to W-2 workers for Social Security purposes. The change might apply only to very large, profitable employers that employ a certain large number—hundreds of thousands, for example—of 1099 workers to reduce the burden placed on small businesses.
4. Dedicate a new source of progressive revenue to Social Security. While the vast majority of Social Security OASDI financing comes from payroll taxes (90 percent), payroll taxes are considered regressive, even though Social Security benefits are progressive. Only about 3 percent of Social Security’s dedicated revenue comes from a progressive source. Specifically, a portion of the benefits paid to higher income Social Security recipients are considered taxable income; proceeds from this tax are dedicated to Social Security. Other progressive sources of revenue, such as the Estate Tax or a Financial Transactions Tax, might be dedicated to Social Security to increase program progressivity and to increase trust fund revenues.
Reform Unemployment Insurance
Unemployment Insurance (UI), unlike OASDI, is a joint state–federal undertaking, in which the obligation to make contributions is levied on employers only. The federal government sets broad requirements for who should benefit (workers who are willing and able to work, individuals who have worked, but have lost their job through no fault of their own), but individual states set the eligibility requirements, benefit amounts, and benefit durations. Each state maintains its own trust fund for UI benefits. In addition, the federal government maintains the federal unemployment insurance trust fund, which pays all administrative costs, makes loans to states, and generally pays part of the cost of extended benefits during periods of high unemployment.
Two payroll taxes on employers provide funding for UI; one is levied by the state pursuant to the State Unemployment Tax Acts (SUTAs) and one is levied by the federal government pursuant to the Federal Unemployment Tax Act (FUTA). Like FICA, the primary source of revenue for Social Security, both the SUTAs and FUTA, have two components: the tax base, which is the earnings subject to the tax, and the tax rate, which is the size of the tax when applied to the base.
UI’s financing has been a source of concern for a long time. First, state trust funds are not kept at adequate levels. In theory, states build up trust funds during economic expansions to forward finance the increase in unemployment during recessions. Instead, states keep trust funds at low levels and borrow from the federal government during downturns. The reason for low levels of trust funds in many states is that state governments are reluctant to raise taxes on their employers and potentially deter hiring or new business creation. States compete over employers, creating a “race to the bottom” to have the lowest tax burden.
Second, the experience rating of employer taxes creates the incentive for employers to prevent former, laid-off employees from collecting benefits. Should a worker collect benefits, the employer’s taxes will increase.
The combination of little federal action to modify or strengthen the system’s structure, incentives on state governments to keep taxes low, and incentives on employers to keep costs low creates a system that is chronically underfunded. Rather than increase taxes and shore up funding, many states have opted to keep benefits low or cut them.
Specifically, benefit duration ranges from up to 12 weeks in North Carolina and Florida to up to 30 weeks in Massachusetts, though most states offer up to 26 weeks. Benefit duration also varies with state or local economic conditions in many states. Minimum weekly benefits range between $5 in Hawaii and $188 in Washington, and maximum weekly benefits range between $235 in Mississippi and $795 in Massachusetts.
Broadly speaking, states have not kept UI finances sound or benefits meaningful. During the 2020 recession, the federal government intervened to a great degree to enhance the program. Federal actions included increasing benefits through a flat federal weekly benefit supplement, creating a program for ineligible workers, and extending benefits through Pandemic Emergency Unemployment Compensation. All of these benefits were federally funded.
1. Overhaul the data-reporting architecture and create new performance measures for states regarding benefit levels, eligibility, and receipt rates. States must comply with an array of reporting requirements regarding their programs, but the data on unemployment claims have accuracy issues. Further, performance is rightly centered on timely benefit delivery, but could be expanded to include take-up among the unemployed, to improve benefit adequacy, or to address other measures to improve efficacy.
2. Implement federal standards for benefit levels, eligibility requirements, state tax rates, and state tax bases. All of these aspects of the program are determined by state legislatures, but the federal government can increase minimum standards. The federal government can also set these standards to reflect state economic conditions. For example, maximum and minimum benefit levels might be set as a multiple of the average weekly wage in the state.
3. Explore the cost and benefits of fully federalizing the UI tax and benefit systems. Rather than setting a new floor for states, the federal government might take over application, funding, and administration of the program. Such a change would end any state differences in benefit amounts, eligibility, and tax rates.
4. Bring independent contractors and the self-employed permanently into the UI system. During the pandemic, Congress created the Pandemic Unemployment Assistance (PUA) program for workers who were not eligible for UI because they had insufficient earnings, were self-employed, or were independent contractors. The proposed policy would incorporate these workers permanently into UI, though a separate tax collection method, benefit calculation, and eligibility rules may be required.
5. Include Short-Time Compensation (STC) in every UI system. Also known as work-sharing unemployment insurance, this program enables employers to decrease a worker’s hours and compensate for loss in wages with partial unemployment benefits. As such, STC programs preserve jobs that would otherwise be cut and increase labor force attachment for a larger number of individuals (compared to layoffs). As of November 2020, twenty-five states had STC incorporated into their UI system.
Improve caregiving supports
The majority of workers in the U.S. do not have access to any paid family and medical leave program., At the federal level, the Family and Medical Leave Act entitles some employees in some firms to take unpaid, job-protected leave for specified family and medical reasons. These reasons include the birth or adoption of a child; caring for the employee’s spouse, child, or parent who has a serious health condition; and/or a serious health condition that makes the employee unable to perform the essential functions of their job.
Related to inadequate paid family and medical leave is the lack of an adequate system of long-term services and supports (LTSS) in the U.S. Recent studies find that 50–70 percent of U.S. adults who survive to sixty-five years old will have LTSS needs. Between 2015 and 2050, the number of seniors with LTSS needs is expected to rise from 6.3 million to 15 million. Simultaneously, only 7 percent of the population over age fifty is covered by a long-term care policy. It does not seem likely that the private market will fulfill this need, at least in the short term. In the meantime, families are sacrificing their financial security to ensure that the caregiving needs of their loved ones are met.
Another set of programs that might reduce the burden on a paid family and medical leave program are those relating to the care of children and other dependents. Under current law, the Child and Dependent Care Tax Credit (CDCTC) aims to offset the costs of child and dependent care via a nonrefundable tax credit that varies with income as a percentage of care expenses. Due to its design, the credit does little to help the least financially secure households.
A means by which the federal government aims to offset childcare expenses specifically is the Child Care and Development Fund (CCDF), a joint federal–state partnership, in which the federal government provides block grants to states. Recipients of support via the CCDF are low income and are provided either a voucher with which they may select a childcare provider or a reserved slot at a childcare facility with which one’s state has contracted (in 2017, 94 percent of children benefited by this program were served by the former). Although the CCDF helps many families afford childcare, only about one out of six eligible children receives benefits. Without this or other assistance, low-income families cannot afford the $9,000–$9,600 average annual cost for early care and education for children 0–4 years old.
1. Establish a state-administered paid family and medical leave system under federal guidelines. Such a system would build on the experience developed through existing programs in some states that have implemented social insurance programs for paid leave, but it would extend access to every state.
2. Create a federal paid family and medical leave program. Under this model, the federal government would administer a paid leave program, ensuring uniform eligibility standards, benefit amounts, financing, and administration across the country.
3. Establish a state-administered long-term care system under federal guidelines. A state-administered program would allow states to experiment with the parameters of a long-term care insurance system while ensuring adherence to certain basic standards. Options for coverage range from “front-end,” under which everyone with an LTSS need receives some benefit, to “back-end” or “catastrophic,” under which those individuals with the greatest LTSS needs receive targeted benefits, to “comprehensive,” under which all needs are covered to some degree.
4. Create a federal long-term care program. Under this model, the federal government would administer a long-term care social insurance program, ensuring uniform eligibility standards, benefit amounts, financing, and administration across the country. The Obama administration made efforts to implement such a program under the Community Living Assistance Services and Supports (CLASS) Act of 2010; however, then–U.S. Department of Health & Human Services Secretary Kathleen Sebelius determined that CLASS was not financially viable. Whether or not a program is enacted successfully, long-term care needs continue to grow. The 2013 Congressional Commission on Long-Term Care provides many recommendations under the realms of service delivery, workforce maintenance—for family caregivers—and finance.
5. Significantly increase investments in childcare. Many means could be considered for improving access to, and the quality of, childcare in the U.S. This report does not outline all the options but notes that investments in childcare serve as a complement to any paid family and medical leave type of social insurance policies.
Tax expenditures that reduce an individual’s or a family’s total tax bill are a third type of transfer policy. The options outlined here are all tax credits as opposed to deductions or exemptions. If a tax credit is refundable, a person is still able to receive the full amount of the credit even if that person has no income tax liability. Refundable credits—unlike nonrefundable credits, which are useful only to individuals who have income tax liability—thus benefit low-income households.
Update the Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable tax credit targeted to households with low to moderate earnings from work. The EITC was designed to encourage work and offset the cost of Social Security contributions and other work expenses of low-income workers by providing a tax credit based on a percentage of earnings. The maximum credit varies in size and eligibility depending on number of children and marital status and phases out with additional income. The highest eligible income for tax year 2021 was $57,414 for joint filers with three or more children. That income level corresponds to the earnings of a full-time, full-year worker making about $27.60 an hour, or two full-time workers making about $13.80 an hour.
For workers without children at home, the EITC is very low. For these workers, the maximum refundable credit in 2021 was $543, which was fully phased out for joint filers with earned income of $21,920. The current single-worker phase-out corresponds to a full-time, full-year worker making about $7.68 an hour. Researchers have noted that at $15,980 a year, a worker’s employment and sales taxes would reduce their income to federal poverty levels.
Twenty-nine states and the District of Columbia supplement the federal EITC with their own EITC program.
1. Increase benefit size and eligibility for workers without dependents at home, beyond 2021. With the passing of the American Rescue Plan Act of 2021 (ARP), the maximum credit/refund for this group increased to $1,502 and phased out completely at $27,367 of income. Prior to the ARP, workers not caring for children in their homes were the only group the federal government taxed into, or further into, poverty. This policy would maintain or expand the ARP increase, which was set to return to lower levels after 2021 absent further legislative action.
2. Increase benefit size for workers with dependents at home. The maximum credit a household could claim for one, two, and three or more dependents was $3,618, $5,980, and $6,728, respectively, for tax year 2021. This policy would increase the size of these credits to ensure that low- and middle-income workers with dependents are better compensated for their labor and to account for the cost of caring for dependents.
3. Phase the credit in faster. EITC benefits phase in, reach a maximum level, and then phase out. Each phase-in and phase-out level depends on family structure. A faster phase-in would increase the credit’s value for the lowest earners.
4. Allow workers without children at home ages 19–24 at home and those ages sixty-five and older to claim the credit beyond 2021. Currently, the credit cannot be claimed by individuals under age twenty-five without dependents at home or by individuals over age sixty-four.The ARP made these workers eligible for tax year 2021. No age restrictions apply for workers with dependents at home.
5. Allow independent students to claim the credit. Under current law, students under the age of twenty-four who are working and attending school at least half-time are ineligible for the EITC. Over 60 percent of college students, however, work at least part time, over half of students are financially independent from their parents/guardians, and 39 percent of students report being food insecure. This option would ensure that low-income, financially independent students are allowed to claim the EITC.
Update the Child Tax Credit
Under the ARP, the Child Tax Credit (CTC) provides $3,000 per year per child to families with children ages 6–17 years old and $3,600 per year per child to families with children ages five years or younger. The credit is fully refundable, meaning families with adjusted gross incomes of zero receive the full benefit. For this reason, this credit is referred to as a “child allowance.” The credit begins to phase out at household earnings of $112,500 for single filers and $150,000 for joint filers. Households with incomes that were eligible for the credit in 2020 had the option to receive a portion of the credit in advanced payments throughout 2021 beginning on July 15. This benefit structure ended in 2022 and reverted to its prior form, as described in the following paragraph.
Prior to the ARP, the CTC functioned as a partly refundable tax credit of up to $2,000 per child under seventeen. The credit offset taxes owed. If a person qualified for the credit beyond what they owed in taxes, they would receive part of the credit as a refund. Workers needed to earn at least $2,500 before they were eligible for a refundable CTC. The refundable portion was equal to either 15 percent of earnings in excess of $2,500 or $1,400 per child, whichever was less. It did not vary with the age of one’s children, only a household’s number of children. Households with children ages seventeen and eighteen, older dependents, and full-time college students ages 19–24 were eligible to receive a $500 nonrefundable credit.
1. Increase the value of the CTC per child beyond 2021. This policy would raise the maximum benefits offered by the CTC beyond 2021. Under this policy, the credit will continue to phase out at high incomes; current law for 2022 and onward decreases the credit by 5 percent of adjusted gross income exceeding $200,000 for single filers and $400,000 for joint filers.
This option was enacted under the ARP via an increase from $2,000 to $3,600 for children ages 0–5, from $2,000 to $3,000 for children ages 6–16, and from $500 to $3,000 for seventeen-year-old children.
2. Provide a larger credit to families with very young children, beyond 2021. Research findings indicate that the earliest years of life are critical for development but also see the highest rates of child poverty. An age-varying policy would provide a larger credit for young children to protect very young children from poverty and enable families to invest in children during the critical early years of life. The Canada Child Benefit, for example, began delivering monthly benefits up to $6,765 per year for children under six years old and up to $5,708 per year for children ages six through seventeen in July 2020.
The ARP established a larger credit of $3,600 for children under six years old compared to $3,000 for children ages 6–17.
3. Remove the minimum earning threshold and make the credit fully refundable beyond 2021. As of 2018, 27 million low-income children were not eligible for the full CTC because of the earned income requirements. These reforms would ensure that the CTC is fully available to the children and families who need it the most, while simplifying its structure and making it easier for families to understand.
The ARP enacted this measure, making households with no income eligible to receive the full benefit.
4. Pay out the CTC monthly beyond 2021. The report of the National Academies of Sciences, Engineering, and Medicine regarding how best to reduce child poverty included this recommendation. Typically, tax credits are delivered once a year and, since income and tax liability can vary from year to year, individuals may be wary of taking an advance on their return. A fully refundable credit would not vary if income at low and middle incomes dropped and would thus limit the unpredictability of a tax benefit. This policy would help families better meet the costs of raising children year-round, since child-related expenses such as diapers, cribs, clothing, and activities do not wait for tax time. Households may still be eligible for different benefits if a child leaves or moves into a different household and may be given an option to receive part or all of the credit monthly.
Consistent with this concept, the ARP provided for a portion of the credit to be paid out by the IRS on the fifteenth of each month beginning with July 15, 2021.
5. Exclude the refundable credit from income in determining transfer program eligibility for means-tested programs. This approach would avoid unintended consequences in which increasing the CTC or changing the payment structure might reduce eligibility for other benefits. Under current law, tax credits do not count as income in means-tested programs. This option ensures that disregarding the tax credit payments as income would continue to be the case even if the credit is paid out monthly to certain households.
Create a negative income tax
A negative income tax (NIT) is a system in which the government makes payments to people if their income is below a defined threshold, while taxing people on income above that threshold. If the threshold were, for example, $39,000, about three times the federal poverty level for an individual in 2021, and the NIT rate were 50 percent, an individual with no earnings would receive $19,500 from the government, not including any benefits from other programs or tax credits. In this example, an individual earning $30,000 would receive $4,500 from the government.
In this sense, the NIT is like a refundable tax credit that requires no other sources of income for the benefit to be available. Rather than phasing in to a maximum benefit like the EITC, the benefit would be largest at zero earnings and phase out until the base threshold is earned. An NIT might work in conjunction with existing refundable tax credits, like the EITC, to reduce work disincentives. As a refundable tax credit, it would create an assured income floor in the U.S. for all households, regardless of circumstances. It might also be flexibly designed so that certain sources of income, such as Social Security benefits, would be disregarded from earnings that count against the tax refund.
The NIT differs from a universal income base in that all individuals receive the UIB whereas only individuals with incomes below the defined threshold would receive NIT payments. A NIT in the U.S. nearly became a reality in the early 1970s under Nixon’s Family Assistance Plan proposal. Had it been enacted, the proposal would have set an annual income floor of $1,600 for a family of four, plus $800 in food stamps. Adjusting for inflation from August 1969—when the proposal was announced—to May 2021, the policy would have provided $11,641 in income and $5,820 in food stamps; just under $17,500 in resources annually. Under Nixon’s plan, benefits would be reduced at 50 percent of earnings, or 50 cents for every dollar of household income.
1. Create a negative income tax (NIT) indexed to the average or median wage. An NIT would provide a minimum floor of income, similar to the UIB, and increase every year.
2. Update the EITC to harmonize with the NIT. Policies and programs with different phase-out schedules might create work disincentives. This policy would design the NIT so that it harmonizes with the level, design, and phase-out of the EITC to avoid benefit cliffs or high phase-out rates.