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Social Security redistributes money from minorities to whites

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.

How Social Security redistributes income

• From young to old: The fact that the program is "pay-as-you-go" redistributes money from younger generations to older ones. Benefits are based on earnings history rather than contributions, and each successive generation of workers has faced higher lifetime Social Security tax rates than the previous one did.

• From rich to poor: Low earners receive somewhat higher retirement benefits than they paid into the program while they were working, while high earners get somewhat less than they put in.

• From the healthy to the sick: The Disability Insurance program redistributes money from the healthy to the sick.

• From singles to married people: The spousal and survivor benefits redistribute money from singles (who don't get the benefit) to people who are married.

• From those with short lifespans to those with long lifespans: The fact that benefits are paid out in monthly installments, rather than in one lump sum, redistributes money from people who die early on in retirement to people who live longer lives.

• From minorities to whites: For every $100 paid into the system, white beneficiaries receive $113 in benefits, blacks receive $89 and Hispanics receive $58.

Washington Post

Social Security redistributes money from minorities to whites 11/08/13 [Last modified: Friday, November 8, 2013 6:32pm]
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