Social Security and Race
Monday, October 02, 2000
by Liquin Liu and Andrew J. Rettenmaier
Table of Contents
- Executive Summary
- Social Security as an Investment
- Why Investment Results Differ for Different Groups of Workers
- Comparing Social Security's Cost's and Benefits
- Estimating Social Security's Costs and Benefits for Groups of Workers
- Calculating Expected Net Present Values and Expected Rates of Return
- Net Present Values for Individuals Born in 1935 and 1980
- Implications for Privatization
- About the Author
We have looked at Social Security as a type of investment and have found that it has become less attractive over time. The results we present for single and married workers indicate the range of possible outcomes for members of a given birth year. The return for singles represents the lowest rate of return because all survivors and spousal benefits are forfeited. The return for the married men, because it incorporates spousal and survivors benefits based on a single earner, represents an upper bound for the particular family structure we use. In the future, fewer and fewer families will make it to retirement with only one earner. The true average outcome by race and marital status will fall in the range of results we estimate.
Further, for both races we have used a particular family structure with two children born at the same time. Doing so isolates the effects of Social Security's structure on the rate of return and net present value holding family type constant. Racial differences in the timing of childbirth, the number of children and the labor force participation of women will affect the relative attractiveness of the Social Security investment by group.
Two salient findings emerge from our Social Security rate of return calculations. First, except for some demographic groups belonging to the first two birth years, 1935 and 1940, returns on Social Security investment are significantly below the market alternative of 4 percent for all family types and racial groups. The negative net present values at the 4 percent interest rate indicate the net taxes paid by the different groups of workers. These net tax payments have become larger and larger over time, which suggests that this tax system redistributes from later to earlier generations.
"Virtually all workers today can expect a rate of return from Social Security well below the rate paid by private capital markets."
Since the present values are generally negative, the benefit per dollar of tax paid is less than one. When comparing groups within birth years, several patterns are obvious: (i) women do better than men when measured by both the present value and rate of return, (ii) single-earner couples do better than singles and (iii) blacks do better than whites by net present values but whites do better than blacks by rate of return.
NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.