To: "homestead AT lists.ibiblio.org" <homestead AT lists.ibiblio.org>
Subject: [Homestead] Social Security--more numbers
Date: Tue, 08 Mar 2005 07:48:55 -0700
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.