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
- However, because lower-income workers typically have less education, they spend less time in school, enter the workforce earlier and thus spend more years paying taxes than the higher-income worker.
- Sylvester J. Schieber and John B. Shoven, The Real Deal: The History and Future of Social Security (New Haven, Conn.: Yale University Press, 1999), p. 227.
- In the years covered by the CPS, 1963 to 1997, actual average historical taxable earnings for each group are used. For example, the actual earnings of individuals born in 1940 are known from the year they turned 23 until age 57. The appendix briefly describes how we estimate life cycle earnings for each birth year, but the details appear in Andrew J. Rettenmaier and Thomas R. Saving, The Economics of Medicare Reform, Upjohn Institute for Employment Research, 2000 (forthcoming).
- Other studies have used annual average Social Security earnings or some multiple or fraction of average earnings to represent the historical and projected experience of workers. Using the average, which is based on all workers - young, middle-aged and old - overestimates earnings when workers are young and underestimates earnings when workers are in their prime earnings years. Using a fraction of the average in each year to represent lower-income workers does not allow for the natural progression to higher incomes. Using a multiple of the average to represent higher-income workers suffers from the same shortcomings.
- Because the average group member is the unit of observation, average earnings reflect those of all members of a group, including workers and nonworkers. Mortality rates are based on the same reference point. Thus the results we obtain are representative of the outcomes for the average individual in a birth year by racial group.
- Redemption of Trust Fund bonds means that the Treasury will have to collect additional revenues in the amount of the shortfall or increase debt or that Congress will have to reduce other government expenditures. Each option spreads the burden of financing Social Security across generations in a different way. Collecting additional general income taxes or reducing other government expenditures results in retirees' bearing some of the burden. This would effectively reduce their benefits, lowering their rate of return. The consequences of increasing the explicit debt to finance the redemption of the Trust Fund bonds are more difficult to pin down. In the simplest case, borrowing shifts the burden to future generations. However, if taxpayers care about their offsprings' futures, they will recognize that the issuance of additional debt will burden their children. As a result they will leave them a larger inheritance, consuming less and saving more in order to do so. The latter situation results in an increased tax burden that is equivalent to the case of a general tax increase.
- See the Appendix for a description of how we arrive at our mortality estimates.
- A detailed description of the methodology can be found in Liqun Liu and Andrew J. Rettenmaier, "The Social Security Investment," Private Enterprise Research Center Working Paper #0010, 2000, available at http://www.tamu.edu/perc/0010.htm.
- A real rate of 3 percent was used by Michael J. Boskin, Laurence Kotlikoff, Douglas J. Puffert and John B. Shoven in "Social Security: A Financial Appraisal Across and Within Generations," National Tax Journal, March 1987. C. Eugene Steuerle and Jon M. Bakija, "Retooling Social Security for the 21st Century," Upjohn Institute Press, 1994, used a 2 percent real rate. However, a 4 percent real discount rate was used in a recent study by Julia Lynn Coronado, Don Fullerton and Thomas Glass in "The Progressivity of Social Security," NBER Working Paper No. 7520, February 2000, National Bureau of Economic Research. The generational accounting literature has often used a 5 percent real discount rate as pointed out in Alan Auerbach, Laurence Kotlikoff and Willi Leibfritz, eds., Generational Accounting Around the World (Chicago: University of Chicago Press, 1999).
- See Jeremy J. Siegel, Stocks for the Long Run (New York: McGraw-Hill, 1998), for analysis of the real rates of return of stocks held over long periods.
- We also ignore the small death benefit.
- For purposes of these estimates we have assumed that single and married individuals in each birth year have the same life cycle earnings. This assumption overestimates the earnings for single men, who typically earn less than their married counterparts. On the other hand, single women have a stronger labor force attachment than married women and typically earn higher wages. This implies that our estimates overstate single men's earnings and understate single women's.
- Note that spouses collect benefits on their husbands' accounts. And we assume postretirement surviving spouse benefits are collected up to the normal life expectancy of women in the same birth year conditional on reaching the age of 25.
- Kevin M. Murphy and Finis Welch, "Perspectives on the Social Security Crisis and Proposed Solutions," American Economic Review, May 1998.
- See Martin Feldstein and Andrew Samwick, "The Economics of Prefunding Social Security and Medicare Benefits," National Bureau of Economic Research, NBER Working Paper No. 6055, June 1997; Laurence Kotlikoff, "Simulating the Privatization of Social Security in General Equilibrium," in Martin Feldstein, ed., Privatizing Social Security (Chicago: University of Chicago Press, 2000); and Liqun Liu, Andrew J. Rettenmaier and Thomas R. Saving, "Constraints on Big-Bang Solutions: The Case of Intergenerational Transfers," Journal of Institutional and Theoretical Economics, March 2000, for discussion of Pareto-improving privatization of Social Security.
- Rettenmaier and Saving, The Economics of Medicare Reform.
- See ibid. for a comparison of growth rate options and specific assumptions about how we dealt with several details that arise in forecasting earnings.
- Population Projections of the United States by Age, Sex, Race, and Hispanic Origin: 1995 to 2050 - Middle Series, Vital Rate Inputs, United States Bureau of the Census, Population Division (1996).
- Death registration data from Robert N. Anderson "United States Abridged Life Tables, 1996," National Vital Statistics Reports, December 24, 1998, Vol. 47, No. 13, Table 4, pp. 11-15.
- Felicitie C. Bell, Alice H. Wade and Stephen C. Goss, "Life Tables for the United States Social Security Area 1900-2080," Actuarial Study No. 107, U.S. Department of Health and Human Services, Social Security Administration, Office of the Actuary, August 1992.