Social Security Outcomes by Racial and Education Groups

Abstract

This article evaluates the Social Security outcomes for different racial and education groups. Outcomes differ across groups due to the interactions between group-specific mortality risks and lifetime earnings, the benefit formula, and the benefit package, which includes life insurance, spousal benefits, and retirement pensions. Based on either the rate of return or present value, individuals with less education fare better than those with higher educations. This holds even before accounting for preretirement survivors' benefits, which, when accounted for, reinforce this finding. Single whites do considerably better than single blacks when outcomes are compared by internal rates of return. Accounting for survivors' benefits reduces regressivity, but blacks continue to fare worse than whites. In contrast, based on present values, whites generally do worse than their respective counterparts. Social Security is primarily an intergenerational transfer system providing payments to retired workers and their families financed by payroll taxes on current workers. The Old-Age and Survivors Insurance (OASI) program also provides life insurance through survivors benefits. Because longer lives are positively related to income, the retirement pension favors workers with higher lifetime incomes, other things equal. Conversely, survivors' insurance is more likely to be awarded within groups with higher mortality rates at younger ages, which happens to be those with lower incomes. Further, the benefit formula replaces a higher percentage of the income of workers with lower lifetime earnings, while spousal retirement benefits favor couples in which only one spouse works. As a result, any particular group's outcome depends on their lifetime earnings, their group-specific longevity, the tax rates they face, and the Social Security benefit formula. There have been quite a few studies devoted to calculating the internal rate of return and net present value of Social Security.' Some consensus has been reached by those studies: early generations do better than later generations, women do better than men, and married couples with a single earner do better than singles or working couples. These results are not surprising given that a pay-as-you-go system usually generates a higher return in its start-up phase than in the mature phase, that women live longer than men, and that nonworking spouses receive benefits without making tax payments. However, to date, a consensus has not been reached on some of the more interesting but less obvious issues such as how different income classes or different races fare in the system. This article