As the Rich Outlive the Poor, Social Security’s Safety Net Shifts from Poor to Rich
By Neil Irwin, New York Times
Social Security is designed to ensure that no workers go penniless in old age and also as an equalizer between rich and poor. It is structured to give more generous retirement benefits to low-income people, given the taxes they pay during their working years.
For example, an American man who is consistently in the top 1 percent of earners — making $2 million last year — will, if he starts taking Social Security benefits at age 66 and lives to be 87, end up with more money than he and his employers paid into the system in taxes during his lifetime. In the language of finance, he would receive an inflation-adjusted “internal rate of return” of 1.07 percent.
By contrast, if a member of Mr. Moneybags’ household staff, born the same year, made about $30,000 annually and also lived to be 87, he would receive a 2.57 percent return after inflation. That’s quite a decent return — a higher rate than any inflation-adjusted U.S. Treasury bonds pay, for example.
That’s progressivity in action. Or rather, it would be if Mr. Moneybags and his gardener actually lived to the same age.
But in reality, a large body of research shows that the rich live longer — and that the life span gap between rich and poor is growing. And that means that the progressive ideal built into the design of Social Security is, gradually, being thwarted. In some circumstances, the program can actually be regressive, offering richer benefits to those who are already affluent.
For example, for American men in the top 1 percent like our Mr. Moneybags, 87 really is a typical life span, according to research by the Stanford economist Raj Chetty and seven colleagues that was published in the Journal of the American Medical Association this month.
Alas, a gardener earning $30,000 a year is unlikely to live that long. Men in that income tier die, on average, at age 78. In this hypothetical case, that nine-year gap in expected life span radically shifts the relative financial return the two men would receive on their tax dollars.
If the gardener died at age Chetty’s research suggests is typical for men at that income level, he would lose about $115,000 in benefits, compared with what he would receive if he lived as long as the wealthy man. And he would earn a 0.92 percent rate of return on his tax dollars — a bit lower than that earned by his much wealthier boss.
(The numbers on rate of return come from a model built by The New York Times that is based on the Social Security Administration’s work sheet to help people calculate benefits. The data is for people born in 1954 who began their peak earning years in 1980 and worked for 35 years at a constant inflation-adjusted income. At most levels, poorer people still experience higher returns than the wealthy even adjusting for life span, though that could change if the life span gap keeps widening.)
That result wasn’t obvious when Social Security benefits were designed. The benefits were intended to replace 90 percent of a person’s first dollar of earnings but only 15 percent of their earnings over $5,157 a month (and nothing above the income cutoff of $9,875 a month), giving less affluent people a theoretical advantage.
But Social Security has always been designed as a social insurance program, not as an investment fund. Essentially, the people who die unusually young subsidize those who live unusually long lives, so if you look at the program on narrow return-on-investment grounds, a person who lives to 110 is getting a far better deal than people who die a month after they first draw benefits.
And because different groups of people have different life expectancies, some groups receive more value from every dollar of payroll taxes they and their employers pay into the system. Overall, women live longer than men and African-Americans die younger than whites.
The idea that differing life spans between rich and poor would reduce the progressivity of Social Security isn’t new; the Brookings Institution economist Henry J. Aaron identified the problem in a 1977 paper. Research published in 2000 found that, with certain assumptions, the Social Security retirement system as a whole is regressive, or more favorable to the affluent than to the poor.
What is new: It is becoming overwhelmingly evident that the life span gap between rich and poor is widening. A study published this year by Barry Bosworth, Gary Burtless and Kan Zhang found that life expectancy for the bottom 10 percent of male wage earners turning 66 this year has risen 0.7 of a year compared with what was expected for their low-income counterparts 30 years ago. For the top 10 percent of male wage earners, however, life span rose 8.1 years in the same period.
The research from Chetty and his colleagues indicates that the richest 1 percent of Americans gained three years of life expectancy from 2001 to 2014 alone, while the poorest had almost no gain (0.3 of a year).
For anyone who believes that it’s important for the Social Security program to remain progressive, the life-span shifts have big implications that are made more acute by the program’s financial problems.
Money coming into the system each year isn’t enough to pay benefits, and the Social Security Trust Fund is forecast to be depleted in 2034. That implies benefit cuts, tax increases or some combination or variation in the years ahead. As lawmakers consider Social Security’s future, the lessons from the latest research on inequality and life span are pressingly relevant.
A popular idea among many fiscal centrists and conservatives is to fix the finances of Social Security by increasing the full retirement age. (It is 66 and on track to rise to 67, though retirees can take a reduced level of benefits at age 62 and higher levels up to age 70.)
But the life span differential suggests that such a change would fall heavily on the backs of the poor. It’s true that on average Americans are living longer than they were in 1983, when the last major overhaul to the finances of the program was made.
“The way it’s usually put is: Has the health status of people near retirement age improved across the board?” said Burtless, a senior fellow at the Brookings Institution. “But for many people it has not. People who have done backbreaking work or physically demanding work were no more fit in 1984 than in 1964.”
By contrast, he argued that raising the maximum annual income level on which Social Security taxes are paid, currently $118,500, would maintain long-term solvency while not putting more of a burden on the poor. That would effectively raise taxes for higher-income people. Another alternative might be to make the benefits structure more progressive, essentially reducing benefits for high-paid workers only.
That points to an important reality: The battles over Social Security aren’t confined to merely technocratic questions. They also concern core issues about government and social justice, and in formulating answers, the new body of research on income and life span really matters.
To Learn More:
Wealthiest Americans Outlive Poorest by at Least 10 Years (by Lindsey Tanner, Associated Press)
700,000 U.S. Seniors Owe $18 Billion in Student Debt; Fed Taps Retirees’ Social Security Checks (by Noel Brinkerhoff, AllGov)
Is it Time for Americans who Earn more than $118,500 a Year to Pay more into Social Security? (by (by Noel Brinkerhoff and Steve Straehley, AllGov)
U.S. Government Redistributes Wealth…to the Rich (by Matt Bewig, AllGov)
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