Social Security is sometimes billed as a great redistributive program that uses a broad tax on all workers to protect the elderly from poverty. But it has features that sound less appealing.
A well-known regressive feature comes from the rule that benefits must be annuitized, paid out over time in monthly installments rather than as a lump sum. This means that richer people who tend to live longer will get a bigger benefit than poorer people with shorter life spans.
Eugene Steuerle, Karen Smith and Caleb Quakenbush of the Urban Institute just discovered an unsuspected regressive feature. Considering its transfers across the generations, Social Security redistributes money from minorities — blacks, Hispanics and others — to usually wealthier whites.
For every $100 paid into the system, white beneficiaries receive $113 in benefits, blacks receive $89 and Hispanics receive $58. This feature will become more pronounced over time. Over the next 10 years, whites will get $120 for each $100 they put in — on average. Blacks will get $91 and Hispanics $62.
The reason is straightforward: The black and Hispanic populations are generally younger. For every elderly pensioner drawing Social Security, there are more workers contributing payroll taxes.
Steuerle and his co-authors contend that this matters. "If one of Social Security's goals is to provide greater relative protections to the most vulnerable, one must ask whether that was a desired or accidental outcome," they write.
The program was indeed intended to be progressive — replacing a higher share of lifetime earnings for poorer workers. But as Steuerle notes, other features can annul this progressivity, and even turn Social Security into a regressive program.