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[Gene GeRue <genegerue AT ruralize.com>]

How to beat the system: live longer


ECONOMIC VIEW
Who Wins in a New Social Security?
By EDUARDO PORTER

Published: March 6, 2005

SOCIAL SECURITY may have done more to help the poor than any other 
government program in American history. Established in 1935 with the 
explicit objective of protecting the elderly from poverty, it has relied on 
a heavily skewed benefit formula that pays lower-income workers a higher 
share of their wages than those at the top of the earnings ladder.

The results? According to government figures, old-age poverty has dropped 
from about 50 percent in the 1930's to around 10 percent today. Most of the 
credit goes to Social Security.

Yet as President Bush sets out to reconstruct Social Security, by allowing 
workers to divert some of their payroll taxes into personal accounts, 
crucial questions remain unanswered: Would a new system retain the 
traditional approach of redistributing income from the more affluent to 
those in need? Or should personal accounts - framed by Mr. Bush as a step 
toward an "ownership society" - usher in a system in which workers keep 
what they actually save?

The president argues that workers can get a better return on their payroll 
taxes if they invest them themselves. Regardless of the truth of that 
assertion, Social Security has not been a simple retirement savings plan 
but an instrument of social policy, using part of the taxes paid by some 
groups to shore up the benefits of others.

Any changes made to the system will inevitably shift this distributional 
mix, and that troubles some members of Congress. "Social Security is a 
central strand in our social safety net," said Senator Gordon H. Smith, 
Republican of Oregon, the chairman of the Senate Special Committee on 
Aging. "I believe its progressive nature has to be preserved," he said, 
adding that he would hold his vote "in abeyance" until "we address these 
progressive issues."

Social Security uses taxes from the rich to bolster the retirement income 
of the poor through a benefit scale that now replaces about 60 percent of 
preretirement earnings for low-income workers but only 30 percent for the 
workers in the highest earning band.

But the program has a multitude of other objectives, moving money every 
which way. An essential reason for the decline in old-age poverty, for 
example, is that older generations - which paid lower payroll taxes - have 
received transfers from younger generations, who have paid higher taxes to 
get the same or even lower levels of benefits.

Social Security aims to protect women who stay out of the work force to 
raise children, offering spousal and survivor benefits that depend on the 
earnings of the working spouse. And the program's disability insurance 
favors workers in tougher jobs, mainly at the lower end of the income spectrum.

Social Security's income redistribution includes some unintended quirks. 
Survivor benefits are regressive, favoring people whose spouses were high 
earners. And the nation's changing demographics have created a patchwork of 
winners and losers that, to some extent, has overridden the system's 
original purpose of favoring the poor.

That's because Social Security is more generous to people who have more 
time to collect benefits, like women, who are expected to live three years 
longer than men, on average, after retirement, and whites, who, after 
reaching 65, are expected to live a year and a half longer than blacks.

Calculations by C. Eugene Steuerle and Adam Carasso of the Urban Institute 
offer this contrast: A 65-year-old single man who retires this year after a 
career in which he earned an average of $36,500 a year, in 2005 dollars, 
will get $164,000 in retirement benefits over the rest of his life, on 
average, based on his expected life span of 81.1 years. That is about 
$8,000 less than he would receive if he invested his payroll taxes at a 2 
percent rate of return, after inflation.

But a single woman with a similar earnings profile can expect to receive 
$206,000 - or $28,000 more than she would get by investing the 
contributions at the same 2 percent rate, merely because she is likely to 
live longer.

Because the poor and the less educated tend to have lower life 
expectancies, they sometimes end up getting a worse return on their payroll 
taxes. According to projections by Mr. Steuerle, Mr. Carasso and Lee Cohen 
of the Social Security Administration, a male high-school dropout who 
retired over the past decade will receive retirement benefits equivalent to 
his lifetime payroll taxes invested at a 2.7 percent annual rate of return, 
after accounting for inflation. But for a college graduate, the implicit 
rate of return on his payroll taxes is 3.2 percent, because he is expected 
to live seven years longer.

What would Social Security reform do to all of this? Personal accounts, in 
which people invested their own money for their own retirement, would not 
redistribute wealth by themselves.

If poor or uneducated workers were allowed to take their stash as a lump 
sum, though, dying younger would be less of a financial loss. And depending 
on how Social Security is brought back into long-term financial balance, 
the distribution of benefits could be reconfigured substantially.

CUTTING benefits by raising the retirement age, the choice of Social 
Security's reformers in 1983, would penalize poorer workers with shorter 
life spans. But the system could be skewed to transfer more income to the 
poor. In a report last year, the Government Accountability Office analyzed 
a plan designed to restore the system's solvency. It included carving out 
savings accounts, as Mr. Bush suggests, combined with indexing of benefits 
to inflation instead of to wages and providing low-income retirees a 
minimum pension of 120 percent of the poverty line. The G.A.O. found that 
such a system would redistribute more income from high earners to low 
earners than Social Security does today.

The G.A.O.'s exercise also underscored how changes in the system could 
undermine Social Security's original goal of protecting the elderly from 
poverty. Bringing Social Security to long-term solvency without raising 
contributions would require cutting benefits. Even if personal accounts 
earned a 4.6 percent annual rate of return over a worker's career - 
President Bush's central assumption - overall benefits for the bottom fifth 
of wage earners would be 4 percent lower than their benefits under the 
current system.

http://www.nytimes.com/2005/03/06/business/yourmoney/06view.html