| Posted: October 10th, 2012
Several recent press accounts have used figures developed by my Urban Institute colleagues C. Eugene Steuerle and Stephanie Renanne and others by the Social Security Administration to conclude that most Americans now get a raw deal from Social Security. True, these figures show that an average two-earner married couple will collect less in lifetime Social Security benefits than they would have received if they had instead deposited their payroll tax contributions and those of their employers into a simple savings account. But that doesn’t mean the system is broken.
These calculations rely on stylized life histories that don’t apply to most working Americans. For example, some computations assume that each spouse works every year from age 22 to age 64, always earning the national average, and begins collecting Social Security at age 65. For most of us, the reality is more complicated. We generally start out making much less than the average. Many of us, especially women, take time off or work part-time to care for children or other family members. Job loss, injury, or illness sometimes interrupts our careers. Nearly half of us retire at or before age 62. And most wives still earn less than their husbands. Making the two-earner, average-earning career model more realistic lowers estimated benefits somewhat but reduces estimated taxes far more, implying more favorable returns from Social Security for large swaths of the population.
Instead of focusing on hypothetical couples or individuals who aren’t typical of most Americans, consider the projected distribution of Social Security returns from a large sample of earners born in the early 1950s who are now in their early sixties. We see that individual lifetime Social Security experiences vary tremendously. Some people contribute for many years but die before they can collect (so their ratio of benefits to contributions is zero). Others become disabled early in life or live longer than most and so receive far more in benefits than they paid in taxes (pushing their ratio above two).
Cumulative Distribution of Ratio of Lifetime Social Security Benefits to Lifetime Payroll Tax Contributers, 1952-1955 Birth Cohorts
This variability in Social Security returns is a defining feature of any insurance program. But Social Security is a unique form of insurance, providing guaranteed, inflation-protected income for life upon retirement or disability (and, after death, to dependent survivors). It safeguards against risks that are difficult to predict—like experiencing a severe disability early in life or living far longer than average. Affordable, comparable products are hard to find in the private market.
Undeniably, Social Security was a great deal for earlier generations, who were much more likely to live in poverty than current and near retirees. And more workers in the future will get less than they paid in, particularly as the system adjusts to the financial pressures created by the surge of Baby Boomer retirements. But that’s partly because many current and future workers can expect to earn more than earlier generations did. And partly because those workers who are getting less than they paid in will reach retirement age without experiencing a severe disability, will have died too young to receive any benefits, or will receive lower replacement rates because of relatively high earnings. For a majority of the population, Social Security remains a good deal. As we look to improve the program’s funding status in a fair way, let’s focus on maintaining a reasonable distribution of lifetime benefits and contributions, rather than focusing on whether the system looks good for an “average” individual or couple who does not in fact reflect typical Americans’ experiences.
Filed under: Government Add a Comment »
| Posted: December 13th, 2011
Last month in MetroTrends, Margaret Simms pointed out that Social Security is more than a retirement program since it also provides income support to disabled workers and the dependent spouses and children of retired, disabled, or deceased workers. Let me second her point that Social Security is vital for many households whose benefits comprise much or, in some cases, all their income. And let me show you what this means in my hometown—Washington DC.
Social Security Administration data on DC show quite clearly that the program’s impact varies by neighborhood. While the distribution of Social Security beneficiaries by benefit type as a whole mirrors national numbers, various program components have more impact in some city neighborhoods than others. For example, in DC zip codes east of the Anacostia River, disabled workers’ and children’s benefits are more prevalent than in the U.S. as a whole, while in the remaining zip codes retired worker benefits are more common than average. Data on total benefit amounts—rather than beneficiaries—show a similar picture.
Distribution of Social Security Beneficiaries By Type of Benefit Nationwide and in the District of Columbia, December 2010
Source: Social Security Administration, OASDI Beneficiaries by State and ZIP Code, 2010
These patterns reflect deep structural differences in Washingtonians’ experiences and opportunities. Reflecting the city’s history of racial segregation, DC neighborhoods still differ greatly in their demographics, income, and wealth. East-of-the-River communities have younger populations, relatively more African Americans and fewer foreign-born residents, more adults without a high school diploma, lower average incomes, and higher unemployment and poverty rates than DC averages.(To compare local characteristics, try this handy tool that presents demographic and economic data about DC by zip code on the NeighborhoodInfoDC website, a partnership of the Urban Institute and the Washington DC Local Initiatives Support Corporation.)
Given DC’s heavy reliance on Social Security, those of us who live here have a major stake in proposals to change the program. Confirming findings from the Urban Institute retirement policy program’s broader work on Social Security, one priority should be accounting for differentials in key life-course processes, like disability, employment, mortality, and marriage. In particular, some proposals exempt disabled workers from certain benefit reductions and others don’t. Congress needs to consider diverse, changing family and work lives when considering program adjustments.
A second concern is related: design details can affect economic well-being more in some communities than others. Our recent study on the distributional effects of the Social Security proposal of the National Commission on Fiscal Responsibility and Reform describes one provision to cover newly hired state and local workers that would have disparate impacts in a handful of states including Massachusetts and Ohio, where comparatively fewer public-sector workers participate in Social Security. Likewise, the proposal’s differential effects by lifetime earnings and birth year would mean larger average benefit reductions in some communities than others if Congress were to enact legislation like this.
Comparisons presented in our report drive home a third key point: the sooner Congress puts Social Security on a sounder financial trajectory, the smaller the program changes will need to be. Earlier action gives workers and beneficiaries more time to plan and, if necessary, work and save more to reach their retirement income targets. Haste in changing this essential program would be pound foolish, but sooner is better than later for bringing the system into long-run fiscal balance as Baby Boomers’ retirements narrow policy options.
Filed under: Government, Urban Culture, Washington DC 1 Comment »