Social Security and Race

Studies | Social | Social Security

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


Net Present Values for Individuals Born in 1935 and 1980

Table I - Social Security Expected Net Present Values for Men Born in 1935 Based on 4 percent Real Rate of Return

"Although blacks earn a lower rate of return, they can expect to 'invest' fewer dollars in the system."

As the preceding figures indicate, the attractiveness of Social Security varies over time and between groups. But the graphs present only the bottom line - the net present value or the internal rate of return. The following two tables identify the component parts of the benefits. By looking at them we can more precisely identify how the life insurance and retirement pensions affect the two races' outcomes. Further, the component parts - both taxes and benefits - show that the size of the investment is different for each group.

Projected Taxes and Benefits for Workers Born in 1935. Table I presents the components of the net present value calculations for individuals born in 1935. Taxes are listed first. In total, whites pay almost $17,000 more in average lifetime taxes than blacks, paying $47,127 versus $30,234.

Survivors Benefits Before Retirement. Four categories are identified under the benefits heading. The first is benefits arising from preretirement deaths. These benefits are based on our standing assumption that families have two children born when the worker is 25 and that each child and the surviving spouse collect benefits. Survivors of black decedents collect $9,440 and survivors of white decedents collect $4,603. Thus even though black men earn less than white men, their higher mortality at younger ages results in higher survivors benefits.

Retirement Benefits. The next category identifies the individual's own retirement benefits. On average whites collect $27,933 while black retirees collect $14,150. The difference between these benefits and the total taxes produce the net present values for single men previously presented in Figure IV. Single men pay taxes over their entire working life, and the only component of Social Security they collect is their own retirement pension. White single men pay a lifetime tax of over $19,485, while black singles pay a lifetime tax of $16,083.

Table II - Social Security Expected Net Present Values for Men Born in 1980 Based on 4 Percent Real Rate of Return

Spousal and Survivors Benefits After Retirement. The final two benefit components are spousal retirement benefits and survivors benefits that accrue after the worker attains retirement age. The spousal benefits are equal to half of the pensioner's benefit while he is alive. This of course assumes that the wife does not collect benefits based on her own earnings history. The survivors benefits are equal to the pensioner's benefits from the time he dies until the spouse dies. Accounting for all benefits, married white and black men born in 1935 receive a net transfer of $4,641 and $2,751, respectively. By looking at these component parts of the Social Security package, we see that the survivors insurance arising from preretirement deaths tends to favor blacks, but the benefits awarded after reaching retirement favor whites.

"Single black men retiring today will receive 47 cents in benefits for every dollar in taxes, compared to 59 cents for whites."

Table I also reports the internal rates of return and the moneys worth ratios - the percentage of each tax dollar that is returned in the form of benefits. Single black men receive 47 cents for every dollar in taxes and single white men receive 59 cents. For married men the results are similar, with members of both racial groups receiving about $1.10 for each dollar in taxes paid. The internal rates of return are those depicted in Figures VII and IX. For this birth year the rates of return for single blacks and whites are 1.5 percent and 2.24 percent respectively. The rates for married men are almost the same, with blacks receiving a return of 4.43 percent compared to 4.35 percent for whites.

Projected Benefits and Taxes for Workers Born in 1980. Table II presents the results for 1980, the last birth year we analyzed. As in the previous table, differential mortality rates drive the relative distribution of tax payments and benefits.

"Single black men entering the labor market today will receive 34 cents in benefits for every dollar of taxes paid, compared to 47 cents for whites."

Among blacks, benefits to survivors of individuals who die before reaching the retirement age account for 27 percent of all benefits, but for whites these benefits make up just 9 percent of the total. As the numbers show, the net present values and internal rates of return have declined across the board. Again, single black men fare worse than single white men when compared on the basis of the internal rates of return and the benefit per dollar of tax paid. Married black men are expected to receive $0.77 for each dollar in taxes while married whites are expected to receive $0.84. Thus the Social Security investment delivers less than a 4 percent rate of return for both groups and is a poorer investment for blacks with this particular family structure.

It is instructive to consider the relative outcomes when spousal retirement benefits are omitted because their importance will decline with each successive group of retirees as more women's benefits are based on their own work histories. Omitting the spousal benefits causes net present values to fall to -$24,335 and -$33,571 for blacks and whites, respectively. The benefits per dollar of tax paid are almost identical at 0.60.


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