Our updated numbers for lifetime Social Security and Medicare benefits and taxes are now available, based on the latest projections from the Social Security and CMS actuaries for the 2013 trustees’ reports for OASDI and Medicare. Couples retiring today, with roughly the average earnings of workers in general, as well as average life expectancies, still receive about $1 million in lifetime benefits. This number is scheduled to increase significantly for future retirees and is higher for those with above-average incomes and longer life expectancies.
Little has changed on the Social Security side from our previous estimates, as the program has undergone no significant reform in recent years. Our estimates of present values of Medicare benefits for future retirees have decreased slightly from last year as slower health care cost growth has made its way into projections. By 2030, Medicare benefits (net of any premiums paid) are about 90 percent of last year’s estimates, still a significant multiple of Medicare taxes paid. (As in 2012, our numbers incorporate a Medicare cost scenario that assumes the “doc fix” and other adjustments will be extended, not the “current law” scenario in the trustees report.)
We have been publishing these numbers for a long time—and not without controversy over our intent. Our hope is simply that better and more complete information will help elected officials decide whether Social Security and Medicare are distributing taxes and benefits in the fairest and most efficient way possible, a decision we do not believe possible by looking only at annual numbers or how current, not future, retirees and taxpayers might fare. Therefore, we are delighted that in its most recent Long-Term Budget Outlook, the Congressional Budget Office for the first time also published estimates for lifetime Medicare benefits and taxes, as well as Medicare and Social Security combined. Using a slightly different methodology, CBO produces very complementary results. Differences derive from it using median-wage (rather than average-wage) workers, a 3 percent (rather than a 2 percent) real discount rate, and an assumption of Social Security claiming at 62 (rather than 65). As CBO also notes, expected benefits (and taxes, to a more limited extent) have grown over time for a number of reasons, including longer life expectancies, higher incomes, and rising health spending per person.
In a new brief, my colleagues and I examine how many features of Social Security combine to redistribute money among racial and ethnic groups over long periods of time, combining together generations. We find that the program as a whole, and especially its retirement portion, has likely redistributed from blacks, Hispanics, and other racial minorities to whites.
The major cause? When taxes are compared to benefits for each generation, the early generations of retirees got large windfalls, those retiring today come closer to breaking even, and tomorrow’s retirees on average will get back less than they pay in, assuming some modest interest rate could have been earned on their contributions or taxes. This phenomenon by itself wouldn’t cause interracial redistribution, but whites disproportionately occupy the high-return generations, while Hispanics, more recently immigrated groups, and blacks increasingly occupy the lower return generations.
The immigration part of the story is easy to understand. Hispanics and other recent immigrants weren’t around to receive the windfalls that came about as the system expanded over its early decades. Whenever Congress increased lifetime benefits for retirees and near-retirees, younger workers would be required to contribute for decades to support those higher benefits. Older workers would get those higher benefits with fewer years of additional contributions or, at times, none at all.
As for the redistribution from blacks, they disproportionately occupy the lower-return generations because of their larger family sizes. A simple analogy might be made with a two-family world where one couple has three kids and the second has one, but the kids all contribute the same $1,000 each to support the four parents, who all get the same benefit of $1,000 each. The larger family contributes $3,000 and gets back $2,000. The effect will be permanent unless some other redistributions over time offset this windfall gain for the smaller family.
Of course, these simple stories ignore Social Security’s other moving parts. Its progressive benefit formula, which I consider in many ways brilliant because it is based on lifetime rather than annual earnings, redistributes to those with lower lifetime earnings. At the same time, Social Security contains many regressive features. For instance, as a protection for old age it appropriately requires that payments be made in the form of annuities, but that ends up redistributing to those with higher incomes because they have higher-than-average life expectancies. Also, unlike private pensions where it would be illegal, single heads of household, often lower-income women, are required to contribute for spousal and survivor benefits they can’t receive.
Because of these various offsetting features, the retirement or old-age part of the system exhibits little net progressivity even before adding on this new multigenerational consequence of making each successive generation pay more for each dollar of benefit it receives.
When disability insurance is considered, it adds to significantly to progressivity in the sense of redistributing to those with lower incomes. From a broader perspective, of course, one can hardly consider it a plus that some racial and ethnic groups incur higher levels of disability, along with the huge losses of private income that Social Security does not replace.
The study does not contain policy prescriptions, though my own separate work has for very long time suggested the merits of substantively (not just symbolically) higher levels of minimum benefits and other progressive adjustments. Nor does the study contradict the success of Social Security in reducing poverty dramatically among the elderly, particularly in its early decades. It does suggest that as reform is being considered, we give serious attention to whether the system achieves its stated objectives, including the extent to which it really provides better protection for those individuals and classes who are less well off.
Both the left and right, I think it fair to say, have presumed that the system is far more progressive than it turns out to be—a more recent literature finding to which this study adds. Unfortunately, the Social Security debate, like so many we have today, tends to be argued on a thumbs-up or thumbs-down basis, rather than on how it might be better designed to meet society’s objectives.
Excerpt from “Reforming Social Security Benefits,” Testimony Before the House Ways and Means Subcommittee on Social Security.
In this testimony, I would like to focus on the need for Social Security benefit reform regardless of the current imbalances in the system or the taxes raised to support the system.
Why? Despite Social Security’s great success, its growth in lifetime benefits over time has been decreasingly targeted at its major goals. Even while programs for children and working families are being cut, combined lifetime benefits for couples turning 65 rise by an average of about $20,000 every year, so that couples in their mid-40s today are scheduled to get about $1.4 million in lifetime benefits, of which $700,000 is in Social Security.
Social Security has morphed into a middle-age retirement system. Typical couples are receiving close to three decades of benefits. Smaller and smaller shares of Social Security benefits are being devoted to people in their last years of life.
If people were to retire for the same number of years as they did when benefits were first paid in 1940, a person would on average retire at age 76 today rather than 64. Soon close to a third of adults will be on Social Security, retiring on average for a third of their adult lives.
While Social Security did a good job reducing poverty in its early years, it has made only modest progress recently, despite spending hundreds of billions of dollars more. The program discourages work among older Americans at the very time they have become a highly underused source of human capital in the economy.
The failure to provide equal justice permeates the system. It discriminates against single heads of household, spouses with relatively equal earnings, those who bear their children before age 40, long-term workers, and many others. At the same time, private retirement policy leaves most elderly households quite vulnerable.
Unfortunately, the Social Security debate has largely proceeded on the basis of being “for the box” or “against the box.” The contents themselves deserve scrutiny.
How might one break through the stalemate and find areas of mutual agreement? While I applaud the efforts of the Simpson/Bowles Commission and the Bipartisan Policy Commission I believe we can go much further to address the problems I just raised. How? We should start with a basic set of principles and see where they lead us.
Consider. Inevitably balance will be paid for mainly through benefit cuts or tax increases on higher income individuals who have most of the resources. That debate need not derail other needed reforms. I suggest proceeding in the following order:
First, consider reforms aimed at meeting Social Security’s primary purposes:
- providing greater protections for those truly old or with limited resources;
- supporting the work and saving base that undergird the system; and
- providing more equal justice for those suffering needless discrimination in the system, like single heads of household and longer-term workers.
Some of those fixes cost money, and some raise money; we don’t have to address trust fund and distributional consequences in each and every change.
Second, further adjust minimum benefits and the rate schedule and indexing of that schedule over time to achieve final cost and distributional goals. The extent of these adjustments will also depend upon the tax rate and base structure agreed upon.
My testimony provides a fairly detailed way to engage this type of reform process. It largely follows the logic I applied to taxation when serving as the economic coordinator of the Treasury effort that led to the bipartisan-supported Tax Reform Act of 1986, and in my testimony before the Simpson/Bowles Commission.
Arithmetic tells us we must either decrease the growth of Social Security spending or increase taxes as a share of gross domestic product.
But we should do it with an eye on fairness, growth and efficiency. We’re all in this together, so higher-income families must give up something to deal both with Social Security shortfalls and those in the budget more generally. A modest increase in the wage base for Social Security has some justification since that base has eroded in recent years. But if extended too far, it exacerbates the squeeze on other government programs. How? On the tax side, it tends to preempt other tax increases for non-Social Security purposes. On the benefit side, it attempts to maintain a growth rate of Social Security and other elderly programs that absorb more than all of the scheduled growth in government spending for decades to come, thus continuing a downward spiral in the share of the overall budget devoted to children, education and investment more generally.
Under current Social Security formulas, ending the cap on income would mean that some fairly wealthy individuals would get benefits in excess of $1 million. Though no one thinks that that makes sense as a benefit schedule, capping benefits goes against the Social Security tradition of being paid back for additional contributions. On the technical front, an unlimited Social Security tax would also encourage individuals to reclassify labor income as capital income not subject to Social Security tax. This would be a special problem for the self-employed and owners of partnerships, since Social Security now taxes both their capital and labor income as labor income.
Finally, the Social Security Administration’s Office of the Actuary found that even with a cap on benefits, the wage base expansion would still leave the program running future deficits. We shouldn’t pretend that it does otherwise.
This column was reposted from New York Time’s Room for Debate.
While the increase in dementia among the elderly and the president’s proposal to change the index used to provide cost-of-living adjustments (or COLAs) to Social Security recipients have both received prominent headlines recently, the discussions have largely been independent of one another. Yet any principled attempt to reform our elderly programs, including Social Security, Medicare, and Medicaid long-term care, should consider them together.
A well-designed reform of elderly programs could and should accommodate some of the cost problems associated with dementia by back-loading a larger share of benefits in Social Security to older ages when these and other needs of old age increase. COLA adjustments, whatever their other merits, front-load the system by cutting back on benefits for the oldest the most and those in late middle age or their 60s hardly at all. That the president and Congress have limited ability to engage in these types of discussions and tackle multiple goals at the same time is yet one more example of how our political processes increasingly block us from fixing what ails us.
In a well-cited RAND study, Michael Hurd and his coauthors estimate that dementia-related care purchased in the marketplace will cost somewhere close to $0.25 trillion in 2040 (in 2010 dollars). That sounds like and is a lot of money, but Social Security and Medicare are expected to rise to cost over $3.5 trillion in that same year. Although I am greatly simplifying by ignoring such factors as how much of the $0.25 trillion would be covered by individuals and not the government or the effect of entitlement reform on costs, the raw comparison speaks for itself.
Simply put, some of the private and public budget problems associated with dementia, Alzheimer’s, and other growing problems for the older among the elderly could be addressed by providing higher cash benefits in older ages. Whatever the aggregate size of Social Security in general, one could pay for this reform by cutting back on benefits in younger ages of Social Security “old age insurance” receipt. This would not solve all the associated problems of dementia, but it would be a simple, effective, easy-to-administer step in the right direction. And, by concentrating benefits more in older ages, it would encourage working longer at a time when employment rates for the population as a whole are scheduled to decline.
But this is not the discussion we’re having. Instead, the president and many budget reformers put forward a proposal to adapt what many believe is a better measure of cost-of-living or price changes and apply it to almost all government programs, including Social Security. As a technical matter, a COLA adjustment doesn’t affect the growth in initial Social Security benefits for those who retire, only the inflation adjustment they get after they retire. At that point, they get a small annual cut—e.g. 3/10 of 1% the first year, 6/10 of 1% the second year, and so forth—that compounds every year in retirement, so that by the time beneficiaries are in their late 80s or 90s, some 25 or 30 years of lower COLAs add up to a cut in benefits of as much as 10 percent.
Social Security has never adjusted upward the earliest retirement age for increases in life expectancy. Instead, it reduced the earliest age from 65 to 62 in 1959 and 1962. As a consequence, the share of benefits going to those with 15 or more remaining years of expected receipt has risen dramatically over time, and the share to those with, say, less than 10 years of remaining life expectancy has declined. The COLA proposal, even with some very old age adjustments suggested by the president, would add to this long-term trend of making the program ever less available in relative terms for those in truly old age.
This is not to say that the COLA proposal should not be adopted. Who can oppose trying to measure something better? But attempts to fix systems like Social Security and other elderly programs one parameter or adjustment at a time cannot easily meet multiple worthwhile objectives. Similarly, efforts to back-load the system to meet the needs of true old age, as suggested here, should be coordinated with further adjustments—say, in minimum benefits—to avoid discriminating against those with shorter life expectancies.
With or without a better COLA, therefore, reform of Social Security and other elderly programs requires a more comprehensive approach if we are to meet the needs of old age as they evolve over time. Shouldn’t dementia be a higher priority than early retirement? If we’re going to spend $3 trillion or more annually on Social Security and Medicare by 2040, do we really think that the allocation of those funds be determined by formulas set in years like 1935 or 1965 or 1977, when much of the current system was cobbled together?
On the front page of the Washington Post on March 11, 2013, Michael Fletcher connects the different life expectancies of the poor and rich to the debate over whether Social Security should provide more years of retirement support as people live longer. He mistakenly leaves the impression that adjusting the retirement age for increases in life expectancy hurts the poor the most. In fact, such adjustments take more away from the rich. Let me explain how.
Suppose I designed a government redistribution policy that increases lifetime Social Security benefits by $200,000 for every couple with above-average income that lives to age 62. For every couple with below-average income that reaches age 62, my program would increase benefits by $100,000.
Does this sound like a good policy? Well, that’s exactly what Social Security has done by providing all of us with increasing years of retirement support. People retiring today get many, many more years of Social Security benefits than those retiring when the system was first created. And, the primary beneficiaries are the richer, not the poorer, among us. Throwing money off the roofs of tall buildings would be a more progressive policy, since the poor would likely end up with a more equal share.
Why, then, do some Social Security advocates oppose increasing the retirement age? Because the $100,000 in my example could mean proportionately more money for the poor. For instance, it might add one-tenth to their lifetime earnings (of, say, $25,000 a year for 40 years of work, or $1 million over a lifetime), while the $200,000 to rich individuals might add only one-fifteenth to their lifetime earnings. As it turns out, even this assumption isn’t correct, but let’s assume for the moment it is.
Why would we want to redistribute that way? Following that logic, we should have protected the jobs of all the Wall Street bankers after the recent crash because their wages represented a smaller share of their income than the wages of poorer workers providing support services. Or perhaps we should provide $5,000 of food stamps to those making more than $50,000 and $3,000 of food stamps to those making $20,000; after all, the latter would still get proportionately more.
As it turns out, however, more years of retirement benefits don’t benefit the poor proportionately more than the rich. Yes, the poor have lower life expectancies, but other elements of Social Security offset this factor. A greater share of the poor doesn’t make it to age 62, so a smaller share of them benefit from expansions in years of retirement support. More importantly, those who are poorer are more likely to receive disability payments that aren’t affected one way or the other by the retirement age; hence, again, a significantly smaller share of them benefit from more retirement years. Other regressive elements such as spousal and survivor benefits also come into play for reasons I won’t further explain here. Empirically, these various factors add up in such a way that increases in years of benefits help those who are richer and those who are poorer in ways roughly proportionate to their lifetime incomes.
Setting these disputes aside, the higher mortality rate of the poor at each age does raise many legitimate policy issues. Recipients who stopped smoking a couple of decades ago, for instance, have been rewarded with more and more years of retirement benefits. This, along with many other features of Social Security, such as the design of spousal benefits already noted, does mean that the system is a lot less progressive than most believe.
The more fundamental issue, then, is whether we should better protect those with low-to-average wages during their lives. I believe we should but through better-targeted mechanisms, such as minimum benefits, progressive adjustments to the benefit formula, wage supplements to low-wage workers, and other devices that don’t spend most of the program’s funds on ever more years of retirement for those who are richer.
Yet another reason to worry about the retirement age is that the failure to adjust over time—a couple retiring today at 62 can now expect about 27 years of benefits—has meant larger shares of payments go to those closer to middle age, in terms of remaining life expectancy. Almost every year, a smaller share of payments goes to those who are truly old and more likely to need assistance.
In sum, the recent widening gap in life expectancy, likely due to such factors as differential rates of cigarette smoking, deserves serious attention. But let’s not pretend that throwing money off the roof, or providing more years of retirement support to the non-disabled who make it to age 62, addresses the core issue. There are better ways to compensate than converting a system originally designed to protect the old into one offering middle-age retirement to everyone.
An earlier short highlighted my research with Caleb Quakenbush into how much people pay in Social Security and Medicare taxes over a lifetime, and how much they receive in benefits. For instance, we found that a two-earner couple making an average wage who turned 65 in 2010 would have paid $722,000 in Social Security and Medicare taxes over their lifetimes, but would receive $966,000 in benefits.
These types of numbers often generate outraged debate over how much seniors are “owed” based on what they “paid in” to Social Security and Medicare.
But there is another, more philosophical, issue that these numbers cannot address. Americans do not pay their taxes into a personal account that they can take out, plus interest, when they retire. The money paid into Social Security and Medicare has always been chiefly paid out immediately to older generations. The only exception has been some trust funds which have always been modest in size and are shrinking. Thus, Social Security is effectively a transfer system from young to old, and always has been.
We may feel that because we transferred money to our parents, our kids, in turn, owe us. But we must take into account also how much they can or should afford for this task as opposed to their own current needs for themselves and their children. Think of a one-family society, where three kids support their parents, but then those three kids have no children of their own (or only one or two children). What those three kids gave their parents informs us only slightly on what they can or should get from their own children if there are none or fewer of them. Likewise, when demographics change and there are fewer workers to support an aging population, society has to make adjustments, regardless of what some may otherwise think is “fair” or what they think is their entitlement.
For articles inspired by this research, see a recent PolitiFact.
Increased time spent in retirement is a driving factor behind rising Social Security and Medicare costs. A couple that stopped working at the earliest Social Security retirement age in 1940 would expect to receive 19 years of retirement benefits; a similar couple in 2010 would expect 28 years of benefits. By 2080, couples could be receiving retirement support for 33 years.
This calculation assumes both partners are the same age and will have average life spans. Partners of different ages and those (often higher-income) couples who expect to live longer, such as nonsmokers, receive even more years of support.
As it turns out, these many years in retirement affect more than Social Security balances. Retiring longer also reduces the share of Social Security benefits spent on recipients in their last (e.g., ten) years of life and the income tax revenues to support other government functions.
Expected Years of Retirement Benefits, Earliest Year of Retirement
C. E. Steuerle and S. Rennane, Urban Institute 2010. Calculations based on mortality data from the 2010 OASDI Trustees’ Report.
Assumption: in a couple, at least one partner is still living. ERA was set at 62 for women in 1956 and men in 1961.
For more on this topic, see Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform.