Is Social Security Progressive -- Or Regressive?
May 11, 2000
The primary purpose of the Social Security system is to lift the low-income elderly out of poverty. On an annual basis, Social Security does this by redistributing income from workers to retirees, since retirement benefits are funded on a pay-as-you-go basis by the payroll tax. Even on a lifetime basis, the formula used to calculate benefits explicitly redistributes from those who earned more while working to those who earned less.
Because of this apparent redistribution of income from rich to poor, Social Security is called progressive.
But what if Social Security is not a progressive retirement system, and in fact is regressive -- redistributing income from the poor to the rich?
Measuring progressivity depends on many assumptions, says a recent study that modeled benefits for 1,778 individuals. For instance, higher income individuals tend to live longer than average, while those with the lowest incomes tend to die younger than average. Adjusting for the probability of living until retirement and collecting benefits makes the system less progressive.
Using lifetime incomes, rather than annual earnings, also decreases progressivity. Since the lower wage earner in a married couple receives benefits based on the earnings of the higher income spouse, dividing earnings between them reduces progressivity. Finally, since Social Security drops the lowest earning years from benefit calculations, using potential lifetime income, rather than actual income captures the economic value of leisure and home production.
After these adjustments, the study found the retirement system is neutral: it does not redistribute income.
Finally, although a 2 percent discount rate is usually used to measure the present value of future benefits, this is less than the 3.5 percent earned by the most secure U.S. government securities, and much less than average stockmarket returns. Increasing the discount rate to 4 percent, the researchers found, makes the whole system regressive.
Source: Julia Lynn Coronado, Don Fullerton, Thomas Glass, "The Progressivity of Social Security," NBER Working Paper No. W7520, February 2000, National Bureau Of Economic Research, 1050 Massachusetts Avenue, Cambridge, Mass. 02138.
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