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
Costs and Benefits for Individuals Born in 1935 and 1980
"Most single women can expect meager rates of return."
Upon entering the labor force, workers born in the same year begin their association with Social Security. Most spend the next 40 to 50 years working and paying taxes, and then collect pensions upon retirement. But some die along the way, potentially spawning a stream of benefits to their heirs. Tables I and II take a more detailed look at the shares of Social Security's costs and benefits attributable to those who survive to maturity and to those who do not. The tables also indicate how spousal and survivors benefits affect our estimates.
Costs and Benefits for Men Born in 1935. Table I presents the results for men born in 1935. On the average, individuals with a graduate degree pay $59,610 in average lifetime taxes, 78 percent more than the $33,516 paid by those with less than a high school education.
"Among 65-year-old men, those with a graduate degree pay 78 percent more in lifetime taxes than those with less than a high school education, on the average."
Four benefit categories are identified: (1) survivors benefits resulting from the worker's premature death,18 (2) the individual's own retirement benefits, (3) spousal retirement benefits, and (4) survivors benefits resulting from death at or above retirement age. The expected net present value for single men born in 1935 is negative at every level of education. However, it is positive for married men at every level of education except college graduates - and is only slightly negative for them.
In the case of a worker's premature death, the higher the worker's level of education, the less the survivors benefits. For example, survivors of decedents with less than a high school education collect $8,219 and survivors of decedents with a graduate degree collect $2,104. The almost fourfold differential reflects the greater likelihood of premature deaths among the less educated.
The remainder of the benefits, all of which are received during retirement or by survivors after the worker's death, rise with education level for two reasons. Individuals with more education pay higher lifetime taxes, and even though the benefit formula replaces a smaller share of the higher-income worker's earnings, their benefits rise. Also, individuals with higher education levels receive more benefits due to their longer expected life.
"Single men nearing retirement can expect to get back about 57 cents for every dollar they paid in taxes."
Two rows in Table I summarize the net present values and rates of return for single and married men born in 1935. Those with a graduate degree actually do better than those with an undergraduate degree. Single men with college educations will pay a net lifetime tax of $25,459 while those with a graduate degree pay slightly less, $23,878. Those with a graduate degree have slightly higher expected life spans and earnings. The lifetime tax loss for college educated married men is $405, but men with a graduate degree actually receive a net benefit of $1,880. Consistent with the net present values, the rates of return show that married men with graduate degrees fare better under Social Security than do those who earned a college degree. For single men, the returns are highest at the extremes - for those with graduate degrees and those with less than a high school education.
"Young single men can expect to receive less than 50 cents on the dollar in most cases."
The final two rows show the benefits per dollar of taxes paid. On the average, most single men will get about 57 cents on each dollar they paid into the system. Those with the highest level of education are expected to receive the highest benefit per dollar paid - but like the others, they will receive less from the system than they pay into it. Married men (with a nonworking spouse) can expect more than a dollar in benefits for each dollar paid into the system, except for those with an undergraduate degree, who can expect 99 cents.
"Those who drop out of high school benefit proportionately more from early death benefits."
Costs and Benefits for Men Born in 1980. Table II presents the expected taxes and benefits for men born in 1980. The pattern of results for this group is consistent: as the level of education increases, net taxes rise and rates of return and benefits per dollar paid into the system fall.
Total tax payments for those with less than a high school education are about the same for those born in 1980 as those born in 1935. Reflecting the growth in real wages among the most educated, the tax payments for those born in 1980 are 2.5 times the taxes paid by those born in 1935. Further, the expected tax payments for the most educated men born in 1935 are 1.78 times the taxes of the least educated, but for the 1980 birth year their taxes are 4.14 times as much.19
"Workers with graduate degrees benefit proportionately more from Social Security's retirement pensions."
Except for married men with less than a high school education, men at all education levels born in 1980 can expect to pay more in taxes than they receive in benefits.
Figure VIII identifies the importance of each type of expected benefit for couples in which the husband is the sole wage earner. Interestingly, the composition of the benefits is only slightly different for workers born in 1980 and those born in 1935.