How Social Security redistributes money from minorities to whites

November 7, 2013

How progressive is the Social Security program? It's a surprisingly difficult question to answer.

(Bradley C Bower/AP)
(Bradley C Bower/AP)

There are obvious ways in which the insurance program was designed to be progressive, by redistributing (some) money from high earners to low earners.

But it also has some regressive features: Because retirement benefits are paid out in monthly installments rather than in lump sums, wealthier people who live longer tend get bigger benefits than, say, poor people with shorter lifespans. That's not necessarily a flaw — there are reasons the benefits are paid out monthly, as insurance against old age — but it does have certain side effects.

And here's yet another twist: A new paper (pdf) from the Urban Institute finds that Social Security tends to redistribute money from Hispanics, blacks, and other people of color to whites. That's been true for many decades. It's true currently. And it will be true for the foreseeable future.

The paper starts by noting that there are all sorts of ways in which the Social Security program redistributes money. That's not necessarily a bad thing, the authors emphasize, but it's worth understanding how the system works. Some of these aspects are by design and well-known. Others are less well-studied. Here's a partial list:

-- 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. This is also by design.

--And also... from minorities to whites. What's less well-known, meanwhile, is that Social Security has also redistributed money from blacks, Hispanics, and other people of color to whites. The Urban Institute authors come to this conclusion after looking more carefully at transfers across multiple generations:

Specifically, for every $100 that white beneficiaries pay in taxes, they receive $113 in benefits, blacks receive $89 and Hispanics receive $58. The gap is particularly pronounced for retirement benefits, although the Disability Insurance program narrows the gap somewhat.

The disparity will continue to widen in the next ten years. Whites will receive $120 in benefits for every $100 they paid in taxes, while blacks will receive $91 and Hispanics $62. (Thanks to Eduardo Porter for crunching these numbers.)

There are a few possible reasons for this, the authors say. First, Hispanics and Asians are more likely to have immigrated recently, which means that they're more likely to be paying into the program than receiving benefits. Differences in life expectancies can also affect the distribution of benefits.

The authors make clear that they don't think Social Security benefits should be allocated by race. "We agree that that would be a mistake." They're also careful to note that they're not necessarily objecting to these aspects of the program — say, on the grounds that some recipients might not be getting their "money's worth." "In a system of transfers," they note, "'money’s worth' is a somewhat strange concept. Somebody usually pays on net."

But, the authors argue, if policymakers are planning to alter the system in the future — by either raising taxes or changing benefit levels — and want to pay attention to how the program achieves specific goals like alleviating poverty or distributing burdens across generations fairly, these sorts of analyses are worth keeping in mind for reference.

"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," the authors write. "Social Security legislation was usually passed without these types of data analyses and only a very partial understanding of the effects of its many regressive and progressive features."

Further reading: 

-- The case for expanding Social Security, not cutting it.

-- Senior poverty is much worse than you think.

-- How to sort out Social Security’s finances while making it more generous

-- Health care costs are crowding out everything, Social Security isn't.

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Neil Irwin · November 7, 2013