Redistribution under OASDI

Reprinted with permission by the Brookings Institution Press.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).

This chapter presents the results from a study of redistribution in the Social Security program under current law provisions. The focus is on differences in the redistributional effects between the Old Age and Survivors Insurance (OASI) and the Disability Insurance (DI) programs and how these effects are rolled up into the Old Age Survivors and Disability Insurance (OASDI) program.

The basic findings are presented first, followed by a discussion of the sources of redistribution in Social Security, the data and analytic measures, and the methodology for generating the lifetime earnings upon which payroll taxes and Social Security benefits are based. The results are discussed in detail, looking first at gender, then earnings, education, and finally race/ethnicity, as follows:

—Old Age and Survivors Insurance is progressive in the sense that persons with high lifetime earnings receive lower rates of return than do persons with low lifetime earnings.

—The disability insurance program is even more progressive than the OASI program, but DI is a relatively small program, so that the combined OASDI program is only moderately more progressive than OASI.

—The groups who benefit most when the DI program is added to the OASI program are men, workers in the bottom earnings quintile, high school dropouts, and minorities.

In this chapter redistribution is the transfer of Social Security-related monies from one group to another. The main sources of redistribution in Social Security are:

1. The progressive benefit formula. This formula provides higher returns for the first dollar contributed than for the last. Payroll taxes are a fixed percent of taxable earnings, but benefits are progressive. Persons with low average monthly earnings receive benefits equal to 90 percent of their monthly earnings, while persons with high monthly earnings receive benefits that replace less than 30 percent of their monthly earnings. This effect is seen when one analyzes the data by quintiles of lifetime earnings.
2. Forced annuitization. For most people Social Security benefits are like an annuity. Most beneficiaries receive Social Security benefits until they die. All else being equal, the people who live longer receive more benefits. The influence of lifespan differences is seen when one analyzes redistribution by education since longevity is correlated with education.
3. Spousal and survivor benefits. The Social Security benefit formula gives benefits to the beneficiary's qualifying spouse and survivors without additional contributions. Thus Social Security redistributes income to qualified spouses, divorced spouses, and survivors. This effect provides a partial explanation for differences in redistrubution by gender and education.
4. Disability insurance. All covered workers pay for DI, but only the disabled and their dependents get DI benefits. Thus DI redistributes income to the disabled. DI benefits relative to taxes are more generous than OASI benefits because disabled workers are credited with a full work career.

Note: This report is available in its entirety in the Portable Document Format (PDF).

Usage, posting and reprint of materials on the UI web site:

Most publications may be downloaded free of charge from the web site in PDF format. This information may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact paffairs@ui.urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.

Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.