Document date: May 01, 2004
Released online: May 01, 2004
Number 37 in Series "Straight Talk on Social Security and Retirement Policy"
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.
Social Security was designed to redistribute income from those with higher lifetime earnings to those with lower lifetime earnings. The reason is obvious: the system was created to ensure an adequate retirement income for the elderly. Less obvious is how Social Security's many provisions interact to achieve redistribution. This Straight Talk summarizes the most comprehensive study of those interactions to date, concluding that less-educated, lower-income, and nonwhite groups benefit little or not at all from redistribution in the old age and survivors insurance (OASI) part of Social Security. However, there is substantial redistribution to women, who historically have had lower lifetime earnings than men. A succeeding Straight Talk will examine how the addition of disability insurance restores some progressivity.1
The Social Security program redistributes income in five major ways:
To test how different factors affect this redistribution, we ran a simulation using survey data that began by giving all individuals certain common traits: the same age of death (84.05), the same age of retirement (63.15), and the same benefit formula (41.2 percent of career average earnings). Then, one by one, we reintroduced the progressive benefit formula, actual ages of retirement, and ages of death, noting the effect of each. We did this separately for men and women.
Why go through this type of exercise? It is a mistake to consider Social Security a monolithic program that will simply be replaced by another monolithic program. Granting a spousal or survivors' benefit as an add-on requiring no additional contributions, providing higher survivors' and spouses' benefits to those married to higher earners, basing benefits on earnings subject to tax rather than actual taxes paid, using progressive rates in the benefit formula, and forcing annuitization are all policy decisions that deserve separate attention.
In sum, OASI redistributes from higher earners to lower earners through its progressive benefit formula. It also redistributes from men to women by paying benefits in the form of annuities. Single women (including many divorced women), however, fare much more poorly than married womena fact hidden in the data on all women. OASI does not increase the rates of return of nonwhite, less educated men enough to offset the penalty they face on average because of higher mortality. For the most part, differences in rates of return in OASI across different educational and racial groups are not large for any generation retiring now or in the near future.
Eugene Steuerle is a senior fellow and Adam Carasso is a research associate at the Urban Institute. Lee Cohen is an economist in the Social Security Administration Office of Policy.
This brief highlights findings from Lee Cohen, C. Eugene Steuerle, and Adam Carasso, "Social Security Redistribution by Education, Race, and Income: How Much and Why," paper prepared for the Retirement Research Consortium, Washington, D.C., May 17-18, 2001.
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