Income Redistribution Under Social Security
July 3, 2002
Because the Social Security benefit formula replaces a greater fraction of the lifetime earnings of low earners than of high earners, the U.S. Social Security system is generally thought to be progressive. To see how accurate that belief is, researchers examined the distribution of internal rates of return, net transfers, and lifetime net tax rates from Social Security that would have accrued to people born from 1925 to 1929 if the present rules had been in place for their entire lives.
- Within this group, Social Security provides net transfers equal to just 13 percent of benefits paid (when taxes and benefits are discounted at the sample's 1.29 percent rate of return).
- Because much of this 13 percent redistribution is related to such things as longevity or disability rates, rather than income, the annual income-related transfers are only 5 to 9 percent of Social Security benefits paid.
- Moreover, one in five individuals in the top 20 percent of the lifetime income distribution receives greater net transfers than the average for people in the bottom 20 percent.
Some proposed reforms would supplement or replace the current system with defined-contribution personal retirement accounts (PRAs). Critics believe these proposals could imperil some of the system's redistributive and poverty-reducing components.
For instance, a PRA-based plan would need several billion additional dollars of transfers to maintain the current level of redistribution from high-earners to low-earners -- especially for those with low life expectancies, whom critics say could end up substantially worse off than under the current system.
Blacks and high school dropouts currently receive total rates of return roughly the same as the population average. Because these workers generally have lower incomes, the progressive benefit formula offsets the impact of their relatively high mortality rates.
Source: Andrew Balls, "Does Social Security Redistribute to Low Income Groups?" NBER Digest, March 2002; based on Jeffrey Liebman, "Redistribution in the Current U.S. Social Security System," NBER Working Paper No. 8625, December 2001, National Bureau of Economic Research.
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