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Is Social Security A Stipend for Wealthy Retirees?

Money

If the rich are draining Social Security, why is it that we see dependence upon the system rising rapidly with age?

By Brenton Smith

Is Social Security a safety-net or a stipend for wealthy seniors? Most Americans believe the former.

New research from the National Bureau of Economic Research (NBER) however brings that assumption into question, showing that changes in life expectancy have meant that benefits have fallen disproportionally to the rich.

Typically, the goal of life studies such as this one is to further our understanding of how our life expectancies are changing. This study however specifically looks at how those changes affect our entitlement infrastructure.

While few people will read the report in full, the conclusions are apt to push the debate about Social Security in a new direction — asking how do we price the benefits earned through the system. In terms of data, the researchers present a compelling story. They found that the impact of income on life expectancy is staggering: In 1980, a 50 year-old man in the top 20 percent of income quintile expected to outlive the low-income guy by 7 years. Thirty years later that gap more than doubled to 12.7

The impact on Social Security/Medicare benefits is equally astounding: The NBER research found that increases in life expectancy for the rich led to a rise in lifetime benefits of about $130,000.

Should people with longer life expectancies pay more for their benefits?

Price Discrimination describes the common practice where the same product sells at different prices to different buyers. If you go to the movies the kids pay less than the adults. Today Social Security only applies this practice to wages — where higher wage earners pay more. On the last $1,000 of earnings, a worker pays $103 of tax or insurance premium. In exchange,  low income workers generate a promise of roughly $25 a year more in annual benefits, where as the man or woman earning the maximum gets about $4.28 extra.

Typically Social Security has resisted this approach because it introduces endless questions. Women live longer than men, but they do not pay more for Social Security. Hispanics live longer on average than Caucasians but everyone pays the same rate. Married people cost more than singles. Short-careers cost more than long-ones. This isn’t a small question.

This research isn’t alone. The Health Inequality Project found “The richest American men live 15 years longer than the poorest men, while the richest American women live 10 years longer than the poorest women.”

This Data Asks Three Questions

First, maybe we should increase the maximum amount of wages subject to payroll taxes. If a better job means that you will collect benefits for longer periods of time, we probably ought to charge more for the benefits provided to this type of worker.

Second, maybe the program should be less generous to more well-off workers who they believe will collect benefits over a longer period of time. Cost in this sense means the weight placed on earnings in the benefit formula. At this point, the weight for the highest wages is 15 percent. Maybe we should add another break-point.

Third, maybe we shouldn’t be so quick to increase the retirement age. If the life expectancy gap is as large as the data suggests, raising the retirement age represents a greater cut for the poor than for the rich.

Why Are The Rich a Problem?

In terms of Social Security, these workers tend to collect the highest levels of benefits. If you stretch that systemic feature over a longer period of time, these workers present a material problem to a system that is already unstable.

My Doubts

If the rich are draining Social Security, why is it that we see dependence upon the system rising rapidly with age? Today, about a third of retirees count on Social Security for nearly 90 percent of their income. If you isolate beneficiaries who are over 80, that figure rises to nearly 50 percent. If lower wage workers were dropping out of the population prematurely, it would seem that these figures would not explode higher between ages 65 and 80.

Chicken or The Egg?

Before you jump to the conclusion that income changes life expectancy, you have to look for reverse causation.

In other words, does income change life expectancy or does life expectancy change income? Here is an example: My weight makes my doctors and the people around me nervous. While excess baggage well may shorten my life expectancy, academic research — if not common sense — suggests that it also causes me to have lower wages. Another example, a health event such cancer can turn a high-wage worker into a low wage worker very quickly as employment options narrow.

If you look at education for example, you find people who make good long-term choices. Those choices will tend to increase income and life expectancy. On the other side of the good long-term choice, you find people who take up smoking as a pastime.

The Research Doesn’t Care

For the purposes of the study, it does not matter why people have a shorter life expectancy because it would still be true that lower income people have shorter lives and receive government benefits for fewer years in old age. The why someone is low-income is beside the point to the academics.

Increases The Deadlock in The Discussion

This research will only tend to make those opposed to changing retirement age less willing to consider the option. It re-enforces the argument that we need to increase the taxes on the rich, a solution that has met strong resistance in the past.

This data suggests that the gridlock will grow.

This piece originally ran on FedSmith.Com

 

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