Social Security and Race

Studies | Social | Social Security

No. 236
Monday, October 02, 2000
by Liquin Liu and Andrew J. Rettenmaier


Comparing Social Security's Cost's and Benefits

Figure I - The Timing of Social Security Taxes and Benefits for a Married Man Who Dies at 34 and Is Survived by a Spouse and Two Children

Social Security taxes have three components: Old Age and Survivors Insurance (OASI), Disability Insurance (DI) and Hospitalization Insurance (HI). Together these taxes amount to 15.30 percent of taxable payroll with the Old Age and Survivors Insurance tax accounting for 10.6 percent of payroll. We limit our analysis to the OASI portion of the program because it is possible to isolate its costs - OASI taxes - and its retirement, survivors and spousal retirement benefits.

Eligibility Requirements for OASI Benefits. The primary old age benefits are the worker's own retirement benefits and his or her spouse's benefits. Spouses draw benefits on a worker's account if they do not qualify for their own benefits, having worked fewer than 10 years, or if their own earned benefits are equal to less than 50 percent of their working spouse's benefit.

"Survivors benefits partially offset the loss of retirement benefits for the people who die early."

Survivors Benefits. Accounting for survivors benefits is important, yet it has often been omitted in studies of the Social Security investment due to the difficulty of identifying its impact, particularly of benefits paid after premature deaths. As Schieber and Shoven (1999) point out, supporters of the Social Security program often argue that groups whose members die early in life disproportionately benefit from survivors insurance.2 However, previous studies did not always precisely relate these benefits to the attractiveness of the investment. Our methodology quantifies the effect of survivors benefits on the relative Social Security outcomes for different demographic groups.

It is useful to think of survivors benefits in two parts. First are the benefits resulting from premature deaths or deaths prior to reaching the retirement age.

  • In the case of a premature death, each surviving child under age 18 is entitled to 75 percent of the benefit to which the worker would have been entitled based on his or her earnings history.
  • A surviving spouse is also entitled to 75 percent of the decedent's benefit as long as a dependent child under the age of 16 is in the household.
  • The total family benefit is subject to a maximum that varies but is usually 150 to 180 percent of the decedent's benefit.

Second, and more common, are survivors benefits resulting from deaths after retirement.

  • A surviving spouse is entitled to 100 percent of the decedent's benefit if it is higher than the benefit to which the spouse would have been entitled based on his or her earnings history.
  • A child under age 18 is entitled to 75 percent of the benefit to which the worker would have been entitled.
  • The total family benefit is subject to a maximum that varies but is usually 150 to 180 percent of the decedent's benefit.  
Figure II - The Timing of Social Security Taxes and Benefits for a Married Man Who Retires at 65%2C Dies at 75 and Is Survived by His Spouse

Example of Survivors Benefits Before Retirement. Figure I depicts the case of a man who dies at age 34 and is survived by a spouse and 9-year-old twins. The 11 years of tax payments from ages 23 through 33 represent the investment. Each child receives 75 percent of the decedent's earned pension to age 18, and the spouse receives 75 percent of the earned pension until her children are 16 - up to the family maximum. Finally, if the decedent's spouse does not enter the labor force after his death or if the Social Security benefits based on her own earnings are less than the benefits based on her husband's inflation-adjusted benefit, she receives retirement benefits based on his account.

"One type of survivors benefit results from a worker's death before reaching the retirement age."

Example of Spouse's Survivors Benefits After Retirement. Figure II presents a more common example of a married man who retires at age 65, lives to age 75 and is survived by a spouse who lives to the age of 84 but has no Social Security pension of her own. Here the investment comprises 43 years of tax payments from the age of 23 to 65. While the worker is living, the couple receives 100 percent of his retirement benefit derived using the benefit formula, plus his wife's retirement benefit equal to 50 percent of his pension. If the worker's spouse outlives him, she is entitled to survivors benefits equal to 100 percent of his pension until her own death.

"A second, more common, survivor benefit results from a worker's death after retirement."

How Social Security Indexes Monthly Earnings. The Social Security Administration (SSA) keeps track of workers' taxable earnings from the time workers enter the labor force until retirement. A worker's initial benefit is calculated by converting earnings in earlier years to dollars comparable to those in the year the worker turns 62, using a national average wage index that is updated annually by the SSA. Earnings beyond age 62 enter the calculation without being indexed. The 35 highest indexed annual earnings are added together and divided by 420, the number of months in 35 years, to obtain the worker's average indexed monthly earnings.

Figure III - Social Security Monthly Benefit Formula

"The benefit formula replaces more of the earnings of low-income than of high-income workers."

Formula Used to Calculate Benefits. Figure III shows how average monthly earnings are converted to monthly pension payments. As the solid line shows, the worker's initial Social Security pension is computed using a formula that replaces more of the earnings of low-income than of high-income workers.

  • This year, retirees receive 90 cents for each dollar of the first $531 of indexed monthly earnings.
  • An additional 32 cents is received for every dollar of earnings over $531 and less than or equal to $3,202, and 15 cents for every dollar in average monthly earnings above $3,202.
  • Based on this formula, a worker who had average monthly earnings of $1,500 receives a pension equal to $787, replacing 52 percent of earnings.
  • If a worker had average monthly earnings of $4,000, he or she receives a pension of $1,452, or only 36 percent of preretirement earnings.

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