Social Security and Education
Wednesday, January 31, 2001
by Dr. Liqun Liu and Dr. Andrew J. Rettenmaier
Table of Contents
- Executive Summary
- Social Security's Costs and Benefits
- Estimating the Appeal of Social Security for Individuals with Different Education Levels
- Net Present Values
- Internal Rates of Return
- Costs and Benefits for Individuals Born in 1935 and 1980
- About the Authors
Net Present Values
The experience of single men and women represents the most basic of all Social Security investments. We assume their tax payments produce their own retirement benefits exclusively - no benefits to surviving children, no spousal benefits and no surviving spouse benefits.10
"Men of all education levels would have done better investing their payroll tax dollars at a 4 percent rate of return."
Differences by Education Level in Net Present Values for Single Men. Figure II summarizes the net present values for single men based on their education level and the year in which they were born. All net present values are presented in 1999 dollars and are calculated at the age of 25. As the graph indicates:
- All of the present values are negative, regardless of the level of education; that is, men of all education levels would have done better if they could have invested their payroll tax dollars at a 4 percent rate of return.11
- The present values decline over time; high school graduates who just retired (65-year-olds) paid $20,059 more in taxes than they can expect to receive in benefits, while high school graduates born in 1980 (20-year-olds) will pay $32,667 more in taxes than they can expect to receive in benefits.
- In all years, those with lower educations have higher (less negative) net present values, even though they have shorter life spans; a 20-year-old with less than a high school education can expect to pay $16,264 more in taxes than he receives in benefits, while the net loss of a man with a graduate degree is expected to climb to $93,170.
Another notable feature of Figure II is the growing disparity among the relative net present values for the different groups - a pattern repeated in future graphs. Since the mid-1970s, the earnings of more educated workers have risen relative to the average, while the earnings of the less educated and less skilled have fallen. Further, real wages for the average worker have not grown significantly. Our predictions of future earnings assume that the fanning out of wages will persist.12
"Since the mid-1970's, earnings of more educated workers have risen relative to the average and earnings of the less educated have fallen."
As Figure II indicates, we expect the net present value to rise modestly for workers with less than a college education born after 1960. With their earnings falling relative to the average, the redistributive benefit formula will replace a higher percentage of their indexed earnings. In addition, some of the rise can be attributed to the fact that the retirement age is not scheduled to rise above 67 years of age.13 With a constant retirement age and rising life spans, the retirement period will rise for workers born in recent years. While workers in the recent birth years with lower education levels are expected to see a modest increase in the net present values, the present values for more educated workers are expected to fall.
"Net present values for most women at all education levels are negative."
Differences by Education Level in Net Present Values for Single Women. Figure III reveals similar results for single women. The net present values are higher in general than for single men with the same educations. They are positive for some older women, unlike the net present value for men. The higher net present values result from longer expected lives and lower predicted earnings.14
- Most of the present values are negative regardless of the level of education; all those born in 1950 and later would have done better if they could have invested their payroll tax dollars at a 4 percent rate of return.
- The present values decline over time; high school graduates who just retired (65-year-olds) receive $815 more in benefits than they pay in taxes, while high school graduates born in 1980 (20-year-olds) can expect a net loss of $20,858.
- Those with lower education levels have higher net present values; a 20-year-old with less than a high school education can expect a lifetime net loss of almost $3,672, but the expected loss climbs to almost $76,900 for a woman with a graduate degree.
"Calculations for married men assume a spouse who never works."
Differences by Education Level in Net Present Values for Married Men with Nonworking Spouses and Children. Figure IV presents the net present values for married men with nonworking spouses. To make these estimates, we assume that at age 22 men marry women of the same age. We assume that at age 25 the couple has twin children. Thus survivors benefits are paid for premature deaths between ages 25 and 43.15 These assumptions produce the largest possible net present value on tax payments made by only one worker.16 As Figure IV indicates, the pattern of outcomes is similar to those in the previous figures, with the workers with low education levels having the highest net present values.
- Only for the group at the very lowest education level are the expected net present values for the younger workers positive at all.
- Relative to single men, the net present values improve significantly as a result of the survivors benefits and spousal benefits; the net present value for 20-year-old college graduates is $33,576 more for married men than for single men.
- The net present value for 20-year-old high school graduates is $25,528 more for married men than for single men.