Money's worth in social security benefits: Black-white differences

Abstract

In the wake of public debate about reforming social security, Democratic Party leaders, union leaders, and black leaders defend the current social security program because it is designed to provide disproportionately large monthly benefits to low-wage earners relative to their lifetime average monthly earnings. Despite the progressive benefit formula used by the program, an important question remains: Do black workers receive disproportionately larger benefits during their lifetimes in relation to their lifetime contributions, as well as disproportionately larger monthly benefits? This article presents findings from a study that shows that when the lifetime perspective is taken, black workers receive less money's worth in social security benefits than white workers. Implications for policies are discussed. Key words: benefits; black workers; contributions social security; white workers The United States is facing a dual agenda regarding social security. On the one hand, maintaining the program's financial solvency beyond year 2037 requires some form of structural reform as the Board of Trustees (2000) of the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds warned. On the other hand, policymakers who are concerned about black and other minority group workers need to assess how the current system is working for them. If the system is working well for them, it should be maintained with minimal alterations. If it is not, it needs to be reformed more radically. Such a critical assessment of money's worth in social security benefits is needed because it is generally believed that the current program serves people of color well. In particular, liberal politicians and leaders of black communities tend to defend the current system on the basis of the benefit formula, which is slanted in favor of low-wage earners. Because black workers' earnings tend to be lower than those of white workers, this view is correct--but only partially. The missing variable is the shorter average life expectancy of black workers than white workers. If black workers receive social security benefits for fewer years than white workers, the apparent progressiveness in the benefit formula may be offset to a considerable degree. Indeed, an assessment of the social security benefits that black people are expected to receive during their lifetimes and of the relationship between their lifetime contributions and lifetime benefits is an important prerequisite to making an informed judgment about whether the social security system should be reformed and, if so, in what way. This article addresses the central question: Do black workers, who tend to earn lower wages than white workers, receive disproportionately larger benefits than white workers on the basis of lifetime benefits, as well as on the basis of monthly benefits? This question is critical because the life expectancy of black workers is shorter than that of white workers. Thus, the aim of our study, the findings of which are presented in this article, was to evaluate the degree of money's worth that black and white workers receive for their lifetime contributions. In particular, the study investigated the mean ratio of the present value of lifetime benefits to the present value of lifetime contributions of black and white workers. It also compared the mean ratio of monthly benefits to the average indexed monthly earnings of black and white workers. METHOD OF CALCULATING SOCIAL SECURITY BENEFITS All social security benefits are based on the primary insurance amount (PIA), which is derived in two steps. First, the worker's average indexed monthly earnings (AIME) are calculated by indexing the taxable earnings for each year from 1951 onward to the average wage level in the second year before age 62, disability, or death; summing indexed earnings (and unindexed earnings in the years after age 60); and dividing the sum by the number of months elapsed after 1950 (or age 21, if later) through age 61 (or the year before the year of disability or death). …