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
Why Investment Results Differ for Different Groups of Workers
"The Social Security benefit formula favors low-income workers, but high-income workers live longer and collect more benefit checks."
Social Security rewards different groups of workers at different rates in expected and unexpected ways. Although all workers pay the same tax rate during their working years,1 Social Security's benefit formula favors lower-income workers over higher-income workers. It does so by replacing a greater percentage of the preretirement earnings, the lower the worker's income. But lifetime Social Security retirement benefits are contingent on the length of retirement, and people with longer life expectancies typically have higher lifetime earnings. Thus although the benefit formula favors low-income workers, longevity favors high-income workers. These two factors tend to offset each other.
Also, groups with higher mortality rates during their working years benefit more from the life insurance function of Social Security. Survivors benefits and nonworking spouse benefits reward married couples more than singles, and reward single-earner couples more than couples in which both work. Given these offsetting effects, how different groups of workers fare under the system is hard to predict without precise calculations.