Social Security Is A Bad Deal For Low-Income Workers
May 24, 1999
Social Security is progressive in that those with low incomes get relatively higher benefits than those with high incomes. However, a new study shows that Social Security is not nearly as progressive as it seems.
Economists Julia Lynn Coronado, Don Fullerton and Thomas Glass look at redistribution through the Social Security system.
- They calculate that over a lifetime, someone in the lowest 20 percent of household income will get back about twice as much benefits as he pays in taxes -- $125,700 versus $64,700.
- By contrast, someone in the top quintile will only get about a third more in benefits than he pays in taxes -- $187,000 versus $141,400.
However, these figures are not adjusted for the time value of money -- the fact that a dollar in the future is less valuable than a dollar today.
- Using a two percent discount rate dramatically lowers lifetime net benefits (benefits received less taxes paid) for all income groups.
- In fact, every group has a negative return in present value terms (adjusted for the discount rate); those at the bottom just happen to lose the least.
And because those with high lifetime incomes tend to live longer, adjusting for mortality rates improves net benefits for the top quintile while reducing benefits for the bottom quintile.
Furthermore, Coronado, Fullerton and Glass find that raising the retirement age, raising taxes or reducing benefits all disproportionately hurt the poor.
Privatization, therefore, turns out to be better for the poor than is commonly believed, since all groups would at least get a positive rate of return. The poor would not benefit as much as the rich, but they would still be better off than under the status quo.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, May 24, 1999.
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