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
Estimates of Future Earnings. Our forecast of future taxable earnings follow a methodology described in detail in Rettenmaier and Saving (2000).16 In short, the real growth rates in the component parts of annual earnings are calculated for each group of workers, where group defines age, education, sex and race. The component parts of annual earnings for a group are the percentage working, their annual hours of work and their hourly wage. Growth rates for each earnings component are estimated using inflation-adjusted data from the Current Population Surveys.
The calculated real growth rates then become the basis for projecting earnings into the future. Historical taxable income by race, sex and birth year comes from the Current Population Surveys. In previous work we forecasted the earnings subject to the Medicare payroll tax and since the Medicare tax applies to all labor earnings, historical earnings were not capped at some maximum prior to calculating the growth rates. In the present study, the current Social Security taxable maximum was inflation adjusted and retrospectively imposed on earnings in earlier years.17
Longevity Estimates of Racial Groups. The longevity estimates for racial groups in the birth years of interest begin with the U.S. Census Bureau's 1995, 2005 and 2050 middle series life tables.18 The tables are organized by single years of age, by sex, by race and by Hispanic surname. They provide expected mortality at each age in the three cross sections. However, we are interested in the mortality experienced by individuals born in a given year, not mortality in a given year at various ages. To create life cycle mortality tables we use linear interpolation to fill in the cross-section life tables for intervening years. From the entire set of cross-section life tables we identify the experience of the individuals born in the years under study.
Individuals born in 1935 through 1980 are the focus of our study; the interpolated Census data result in mortality estimates for those born in 1935 from age 60 to age 100. For the youngest birth year, 1980, the Census data cover mortality rates between 15 and 70 years of age. Extrapolated data are used for the years 2051 to 2080, which allows us to track mortality out to age 100 for the youngest birth year.
Death registration data for years prior to 1995 show the number, race and sex of survivors for every fifth year of age at 10-year intervals between the turn of the century and 1996.19 Mortality rates between ages and the years 1940 to 1980 is interpolated to fill in the pre-1995 data and complete the cross-sectional life tables from which the birth year life tables are constructed. Birth year-specific Social Security life tables are used to extend the data beyond 100 years of age.20
Appendix Figure I presents the number of survivors, conditional on reaching 18 years of age for white, black and all men born in 1960. By the normal retirement age of 67, 79.9 percent of white men are expected to be alive, 59.5 percent of black men are expected to be alive, and 77.6 percent of men of all races are expected to survive. For that birth year the Social Security Administration expects 76.3 percent of the men who survive to the age of 18 to survive to the age of 67, 1.3 percentage points higher than the estimates based on the Census data. For more recent birth years the Census Bureau data consistently produces longer life expectancies and ultimately higher rates of return than result from the Social Security Administration data. The Census Bureau produces separate mortality tables for blacks and whites, which show a gradual convergence in longevity, so we opt for the Census estimates throughout.