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Kolluri, Surya P: Hello, everyone. Welcome to the TI Institute Research Academy. As we know, we launched the TIAA Institute Research Academy last year, and we have featured several topics that we have engaged with you on.

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Kolluri, Surya P: They're on the TIAA Institute Research Academy website. So this year, we are… Going more in-depth.

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Kolluri, Surya P: I think as many of us know, at the Institute, we have a Fellows program, and so we thought we would have, you know, deeper subject matter conversations on specific topics.

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Kolluri, Surya P: with our fellows. And, so welcome to this, inaugural, edition of the Fellows Chats. So today, we're going to be talking about a topic that all of us care about, which is, Social Security.

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Kolluri, Surya P: Now, as we have heard our colleague at the Institute, Benny Goodman, say, that Social Security forms a very important foundation when we think about,

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Kolluri, Surya P: kind of our financial security in retirement. So the way Benny describes it is, think of Social Security as the floor that gives us a foundation, and then generating lifetime income from our retirement savings as the mattress

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Kolluri, Surya P: That allows us to sleep comfortably. And if there are excess assets beyond that, that becomes the roof.

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Kolluri, Surya P: And so that's an easy metaphor to think about how we can have financial security in retirement, but Social Security has a very important role to play, which is the foundation, the floor. So today, I am delighted to have with us Gopi Shah Goda.

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Kolluri, Surya P: who is the Director of Retirement Security Project, and the Alice M. Rivlin Chair at Brookings, Brookings Institution.

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Kolluri, Surya P: She's also an NBER Research Associate. Now, the head of NBER is the, a trustee of ours, Jim Poterba, who's actually the chair of our CRAF committee.

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Kolluri, Surya P: So, Gopi is an NBER Research Associate, and she was formerly a senior economist for the Council of Economic Advisors. And of course, we're proud to call Gopi a fellow of the TIAA Institute. So, Gopi, welcome.

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Gopi Shah Goda: Thank you, Siri, it's great to be here.

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Kolluri, Surya P: So, this is a very interesting topic, both internally, Gopi, as well as with our clients. It would be good, I suppose, to start with, what are the types of Social Security benefits?

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Gopi Shah Goda: Sure. Social Security is actually a huge program that serves many beneficiaries. The three different kinds of beneficiaries that Social Security has are retirement beneficiaries, disability beneficiaries, and those receiving survivor benefits.

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Gopi Shah Goda: There's also another part of the program that is called Supplemental Security Income, and that also serves a different set of people. So, let me just go through each of them very quickly, and then I think we'll focus more on the retirement part of the program for the rest of the discussion. So, retirement benefits are paid to those who are at least 62 years old.

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Gopi Shah Goda: Who have worked a certain number of years, and their benefits are based on their earnings history.

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Gopi Shah Goda: and when they start receiving those Social Security benefits. Disability benefits are paid to those who cannot work due to a disability.

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Gopi Shah Goda: that meets the Social Security Administration's medical and insured requirements. These benefits, similar to retirement benefits, can also support spouses, children, and other dependents of the disabled worker.

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Gopi Shah Goda: Finally, there's survivor benefits that are paid to family members of a worker who dies, including spouses, children, and dependent parents. And this other piece of the program, Supplemental Security Income, is a program that provides monthly benefits to people

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Gopi Shah Goda: With limited income and resources, including those with disabilities, blindness, or those who are 65 years or older.

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Kolluri, Surya P: This is so interesting. So, retirement benefits, disability benefits, survivor benefits, and supplemental security income. The scale is vast, right, Gopi? I mean, millions.

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Kolluri, Surya P: recipients of Social Security.

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Gopi Shah Goda: Yeah, it's actually hard to appreciate just how big the program is. So, in total, 74 million people receive some form of Social Security benefits. That is more than 1 in 5 Americans.

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Gopi Shah Goda: And about 56 million of those are receiving retirement benefits, either as the retired worker themselves, or as the spouse of a retired worker, or in some rarer cases, even the children of retired workers. So that 56 million people, again, that's about 1 in 6

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Gopi Shah Goda: Americans total, so are receiving some retirement benefits from Social Security.

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Kolluri, Surya P: That is just stunning to me. 1 in 5, that's 20% or more.

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Kolluri, Surya P: It's just a pretty incredible number in terms of

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Kolluri, Surya P: how important this program is. So, the 56 out of the 73 is on retirement income, so let's talk a little bit, Gopi, about the importance of Social Security for retirees.

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Gopi Shah Goda: Sure. So, if you just take the average benefit that is paid to retired workers, this amounts to about $1,900 each month that is paid until someone dies.

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Gopi Shah Goda: And, another way to think about just how much income that is, is to think about how much income that replaces from, those workers' salaries prior to retirement.

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Gopi Shah Goda: And one important thing to note is that that varies a lot across the income distribution. So, if you look at, retirees, who are

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Gopi Shah Goda: low… have low levels of career earnings. That… their benefit, is… It replaces about 80%

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Gopi Shah Goda: of their pre-retirement wage earnings. However, if you look at someone at the higher end of the lifetime income distribution, so those who have, basically earned the maximum amount that is taxable by Social Security every year.

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Gopi Shah Goda: Then it only replaces about 28% of their pre-retirement earnings.

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Gopi Shah Goda: There's a lot of different ways to measure this, but the basic fact is that the program is somewhat progressive in that it replaces a higher share of earnings for those with lower levels of earnings.

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Kolluri, Surya P: Very interesting. You know, Gobi, Social Security is in the news a lot. It tracks a lot of stories, and you know, often the headlines are, the system is under duress.

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Kolluri, Surya P: And so there are financial challenges, so it would be good to hear from you, you know, the dimensions of these financial challenges.

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Gopi Shah Goda: Sure, yeah. So, first, I think it makes sense to talk a little bit about just how Social Security is financed. So, Social Security is set up as a pay-as-you-go program.

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Gopi Shah Goda: And so that is very different from a program like what we usually have with our employers or with TIAA, to put money in an account that has our name on it, that is paying benefits to us, or paying proceeds later in retirement.

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Gopi Shah Goda: By contrast, Social Security takes in contributions from current workers, that is a share of their, earnings, that they're…

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Gopi Shah Goda: earning right now, and pays out those same funds to current beneficiaries who are receiving benefits from the program. So I like to think of it more as a checking account. There's a trust fund that operates sort of as a checking account. It gets money in every month.

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Gopi Shah Goda: It puts money out every month.

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Gopi Shah Goda: And, the benefits that are… or the amounts that are coming in are based on a tax rate that is applied to all earnings below a certain threshold, and the money going out is based on a certain formula that tells you how much benefit someone has earned over their lifetime.

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Kolluri, Surya P: Very interesting. So I'm thinking of this, maybe an image I have in my mind, Gobi, is like a water tank, so we put water into it.

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Gopi Shah Goda: And we're taking water out of it. Yeah. There's a… there's a reservoir of water, Right.

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Kolluri, Surya P: But picture that, is that reservoir shrinking? Is that what people are talking about?

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Gopi Shah Goda: Yeah, so that's a great way to visualize it, and basically one way you can think about it is that

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Gopi Shah Goda: During the 1960s, when the baby boomer generation was entering the workforce in large numbers, that reservoir was filling faster than it was being depleted.

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Gopi Shah Goda: And so that was building up a reserve in this trust fund that would potentially be used to pay future benefits later.

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Gopi Shah Goda: Now we are at the point where that reservoir is being emptied at a faster rate than it's being filled. And so those reserves are depleting.

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Gopi Shah Goda: And at some point, they're going to be completely depleted, and that date is not in the too-distant future. The Social Security actuaries predict that that will happen by 2033 for the retirement program.

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Gopi Shah Goda: And at that point, the only benefits that can be paid are, what amounts to the money coming in to the program. So, you can't basically drain it out faster than it is being filled.

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Kolluri, Surya P: Right, right, and so that's what they mean when they're talking about, you know, they can only pay out 75%. It's like, whatever's coming in is all you can pay out if there's no reserves. Exactly.

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Gopi Shah Goda: Exactly. And at that point, it seems that we will have the ability to pay only about 80% of the scheduled benefits. So we'll have to reduce the rate of that… those benefits being paid to exactly equal the rate that the

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Gopi Shah Goda: That the reservoir is being filled by. And I'd like to take a moment to just talk about some of the demographic challenges that are

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Gopi Shah Goda: related to that. So, if you think about the workforce in the early 60s, that was when the baby boomers were entering the workforce in large numbers, and they were paying into the system just much more quickly than the share of the population that was claiming benefits.

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Gopi Shah Goda: But since the early 2000s, the tables have really turned. So the share of the population that is between 18 to 64, that we think of the main population of those contributing into the program, has been declining, while the share that is over 65 and older

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Gopi Shah Goda: has grown at the fastest rate in over a century. So it has gone from about 13% of the total population in 2010 to 17% in 2020, and it's expected to grow further.

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Gopi Shah Goda: And that ratio of, sort of, the share of the population receiving benefits relative to the share of the population paying into the program is one of the primary factors that is leading this reservoir to become depleted much faster than it was before.

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Kolluri, Surya P: And I'm also thinking, the fact that a portion of the population is now gig workers.

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Kolluri, Surya P: Right? And may not be contributing to Social Security. So… so the amount of water coming in is not only the number of people, but how much is coming in as well.

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Gopi Shah Goda: Yeah, I mean, and the other big factor here in terms of just population dynamics is fertility rates, too, which have been on the decline for several years. Over the last 15 years or so, we've seen much lower fertility rates, and that means we can already see that in the future.

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Gopi Shah Goda: There are going to be fewer people contributing into the program.

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Kolluri, Surya P: So, given all that, …

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Kolluri, Surya P: what is the discussion, particularly Brookings being nonpartisan, you're thinking about solutions you want to propose.

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Kolluri, Surya P: To the policymakers. So, what are some potential solutions, and what are the political realities of all of this?

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Gopi Shah Goda: Yeah, so from an economic standpoint, there are a lot of plans that have been proposed to address the financing shortfall, but they all come down to basically one of two things, or a combination of both.

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Gopi Shah Goda: You either have to reduce the benefits that are being paid out of the program, or increase the revenue that is coming into the program, or do some combination of both.

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Gopi Shah Goda: There's essentially no free lunch here, so in some cases, it's just the math of the program and the economic reality that this reservoir is being depleted faster than it's being filled, that is leading to

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Gopi Shah Goda: That… that… Set of circumstances.

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Gopi Shah Goda: There are different ways that you could do either of those, so you could raise revenues by either increasing the rate that is applied to earnings, and the same level of earnings that are being taxed right now for the program, or you could increase the base to which that rate is applied.

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Gopi Shah Goda: So you could do things like increase the maximum level of earnings that is subject to the Social Security tax. You could bring in other types of

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Gopi Shah Goda: non-wage benefits into that base to increase the… the set of, earnings that… that that rate is applied to. But overall, that basically…

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Gopi Shah Goda: Those are kind of your set of solutions if you're thinking about ways to raise revenue into the program.

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Kolluri, Surya P: Yeah, either get more water in.

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Gopi Shah Goda: Yep. Less water out. Right. And in terms of the less water out, there are, of course, a number of different ways that one could design, programs that get less water out.

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Gopi Shah Goda: By either reducing benefits across the board, or reducing them more for certain types of beneficiaries versus others. But in total, you know, it all amounts to some kind of benefit reduction.

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Kolluri, Surya P: Yeah. Any final thoughts on this, Gobi? Because I'm going to then also suggest to folks the paper you wrote for us on withdrawal strategies for Social Security, but any final thoughts?

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Gopi Shah Goda: Well, so there are a couple of other things that I think are important to think about. So, one is the sooner we take action, the better, because it gives beneficiaries more opportunities to plan for the future.

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Gopi Shah Goda: And, if we get to the point where we are very close to that date of depletion of the, trust fund reserves,

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Gopi Shah Goda: it reduces that window of just possible options that we have, possible levers that we have to address the problem, and makes it more abrupt for current beneficiaries. The second thing is, not only should we think about how to address the current shortfall.

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Gopi Shah Goda: But we should give some thought to, how to set up the system so that it is more resilient to future changes. So, if you… if you think about

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Gopi Shah Goda: pensions, we usually talk about defined benefit pensions or defined contribution pensions. In one, the money going out is fixed, but the contribution that employer makes on your behalf is variable, right? So those are defined benefit pensions.

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Gopi Shah Goda: If you think about defined contribution plans, the money going in is fixed, but what you get out of it in retirement is somewhat variable.

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Gopi Shah Goda: Well, Social Security is kind of like both a defined benefit plan and a defined contribution system, where both sides have this rigidity in it, right? And that leaves a lot of, …

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Gopi Shah Goda: uncertainty in terms of how that rigidity is resolved in the future. So, right now, it could be that future beneficiaries face that risk.

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Gopi Shah Goda: in the form of lower benefits. It could be that future workers face that risk in the form of higher contribution rates, or it could be that general taxpayers face that risk, right, by general revenues going into the program.

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Gopi Shah Goda: And the… the program is actually not explicit in terms of how that rigidity gets resolved.

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Gopi Shah Goda: And it would be nice, I think, for any kind of reform to also kind of think more about how that

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Gopi Shah Goda: risk could be resolved in the future, just to give more understanding to the public of what it means for demographic assumptions or economic assumptions to be changing in terms of how that affects the program going forward.

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Kolluri, Surya P: Agubi, thank you for painting this picture at a macroeconomic level on the social security system. You've also helped us in the past think through how can individuals

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Kolluri, Surya P: respond to social events, should they fire, etc. And I think the latest paper you wrote for us was around… focused on gender. How should women

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Kolluri, Surya P: be thinking about filing for Social Security in light of all this. So, what we will do, in addition to posting this conversation on our Academy website, we'll also include

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Kolluri, Surya P: papers by Gopi and other fellows on the topic of Social Security as well. So, Gopi, I really want to thank you for joining us and kicking off this Fellows Chats program for the TI Institute.

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Gopi Shah Goda: Thank you for having me.