Don’t underestimate the mess of SSI’s means testing

The Supplemental Security Income (SSI) program provides cash benefits to nearly 8 million people with limited means and ability to work. Applicants must meet strict medical criteria to qualify, although no work history is required (unlike Social Security disability insurance). Unfortunately, SSI has many longstanding problems, including the fact that many beneficiaries remain in poverty despite the support. While recent bipartisan efforts would help beneficiaries by increasing the program’s tough asset limits, the proposed legislation doesn’t address another major problem: miserly benefit levels.

One of the main reasons SSI recipients are in poverty is that the most important benefit is below the federal poverty level. Raising the maximum amount of SSI benefits to the federal poverty level would theoretically solve the problem; it was proposed by Senator Sherrod Brown of Ohio and is popular with voters. Each beneficiary would be at the annual poverty line, or higher by combining the increased benefit levels with their other income, if any. Yet even with the increase in the size of benefits, the normal earnings volatility would continue to cause problems from month to month. Recipients may experience temporary and episodic periods of poverty due to the way SSI payments are determined.

The administrative process

The Social Security Administration (SSA) must collect and review a great deal of information and documentation in order to test SSI benefits. Eligible individuals who are shown to have little or no income receive the maximum benefit. Once working beneficiaries exceed $85 in monthly income, each additional dollar of income reduces the benefit amount by 50 cents. Stricter rules apply to unearned income. After $20 of monthly income, each unearned dollar reduces his SSI benefit by a whole dollar. The whole means-testing process is labor-intensive and inefficient, requiring beneficiaries to go through complicated steps. In particular, the monthly benefits are based on the income of the two previous months.

Here is how the SSA describes its method of calculating benefits:

…we generally base the amount of your SSI payment on your income for the previous two months. For example, a woman living in California receives a Social Security widow’s payment of $500 and an SSI payment of $253. In June, she buys a lottery scratch card, wins $200, and reports it to the Social Security office. This means that in August we will reduce his SSI payment…

Because the benefit determination process is retrospective, a lot of effort is put into catching up. The mismatch leads to overpayments and underpayments, which can hamper the anti-poverty effects of the increase in the maximum benefit.

The issue of overpayment

In the SSA example, a woman ends up with more income in one month, so the SSI benefit is reduced two months later. The process seems simple enough but causes real harm to SSI recipients.

If a recipient does not realize there has been an overpayment and spends the extra money, the resulting reduction in payment puts a strain on their monthly budget. Sometimes the consequences are more extreme. Overpayments typically cause recipients to exceed SSI’s obsolete asset limits, resulting in the suspension or outright termination of their eligibility.

Increasing the maximum benefit would ensure recipients receive more money on average and significantly reduce the level of poverty they experience. However, the overpayment problems would not be solved by larger overall payments. Income increases could still result in unexpected benefit deductions months later, forcing recipients into a brief period of poverty.

The problem of underpayment

The two-month calculation discrepancy can also be immediately detrimental when the amount of the benefit distributed is an underpayment. Underpayments can occur in various scenarios, such as when SSI recipients lose their jobs (340,000 recipients were working before the pandemic).

For example, let’s say an SSI recipient earns $700/month through employment. Under current program rules, they qualify for an SSI benefit of $533.50. The combined $1,233.50/month puts them above the poverty line. If the beneficiary suddenly loses his job and is not approved for unemployment insurance, his income drops to zero. But their SSI benefit will remain at $533.50 for two months. The beneficiary now faces a period of poverty.

Of course, the SSI benefit will be corrected, but people with low incomes, low wealth and serious medical conditions cannot wait two months for this correction. Raising the maximum benefit amount to the federal poverty level should ensure that recipients do not live in poverty, but the problem of delays would remain. Sudden income losses could push SSI recipients into poverty for a few months until benefit levels are adjusted. With this risk looming over them, recipients might be reluctant to pursue employment even if they wanted one.

The answer is greater universal benefit

The program may work differently. Mandating a level of universal benefits at least equal to the individual federal poverty level could prevent recipients from ever falling into poverty and solve much of the administrative burden. The SSA would not need to systematically survey recipients and means-tested benefits (a process that amounts to a tax on recipients before payments are distributed). Instead, the revenue needed to increase benefits could be generated by actual taxes, as is already done to fund SSI.

Monthly fluctuations in income would not cause short-term periods of poverty, as SSI benefits would be adequate regardless and would not require retroactive adjustments. Eligibility for the new base benefit would be based solely on meeting strict ISO medical criteria. Overpayments and underpayments would become non-issues. Any additional SSI benefits to supplement this baseline could be determined on an annual basis.

Recipients would be more financially stable, need to file less paperwork, and be able to pursue jobs without the risk associated with delayed benefit adjustments. Meanwhile, the SSA would have a simpler program to administer.

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