Does social security change the poor? – The fool

Social security provides tens of millions of Americans with retirement benefits, and the majority of those who receive them depend on social security for the bulk of their financial support for retirement. This is especially true for low-income workers, who are not able to save as much during their career and therefore have less support after the end of their careers.

Social security is designed to take into account the needs of low-income earners by replacing a higher percentage of income for low-income earners during their working lives. This makes the social security system more progressive, but according to a recent study by the Center for Retirement Research at Boston College, an unexpected demographic factor might be to remove some of this escalation and create more inequities in the system.

How social security treats workers of different income levels

The method of calculating Social Security benefits flattened the amounts beneficiaries receive from the program in retirement. It is true that the higher your income during your career, the more you returned from social security. However, the extra amount of benefits you get for each additional dollar of earnings decreases as your income increases. For example, up to the first point of Social Security – $ 895 of average monthly income after adjusting for inflation over a 35-year career, starting in 2018 – every additional dollar of earnings corresponds to $ 0.90 extra benefits. Above $ 895, this amount drops to only $ 0.32 per dollar of additional revenue, and when revenues exceed $ 5,397 per month, you receive only $ 0.15 more for every dollar of income.

Some researchers measure the progress of the social security system by comparing the taxes that workers and employers pay to the system with the amount of benefits paid. When looking at overall life expectancies and making calculations comparing social security incomes for low- and high-income people, the results show that the bottom 20% of workers should receive between 80% and 100% of their income. the social charges they have paid into the system. On the other hand, the 20% of the highest-paid workers should recover between 45% and 55% of their social security contributions.

However, what the researchers actually discovered was a different story. The bottom quintile of the income distribution received a lower amount of benefits – about 70% to 90% of what they paid in payroll taxes. Meanwhile, the fifth highest income earner received more social security than expected – between 55% and 60%. This maintains the structure of progressive benefits of social security, but to a lesser extent than that which is assumed.

The problem: mortality

The problem identified by CRR researchers was a gap in mortality rates between different levels of income. High-income individuals have a longer life expectancy than low-income individuals, and this gap has actually increased over time. The study cites reducing the number of smokers as a key factor in the mortality gap, as high-income individuals experienced a greater reduction in smoking than low-income individuals. More generally, deaths from cancer and heart disease show larger declines for high-income individuals than for their low-income counterparts.

Depending on the measure you use, the life expectancy gap seems to have widened by about two to three years between 1990 and 2010. This means that high-income earners could receive on average between 24 and 36 monthly installments Social Security. those with lower incomes. Since the benefit formula does not take into account this difference in mortality experience, this results in greater inequality when measuring benefits over the course of life.

Bridging the retirement problem

The gap in life expectancy also explains some disturbing behaviors among decision makers. For example, low-income retirees often take social security early, accepting lower monthly payments to get them younger. Many criticize this decision as short-sighted, but if low-income retirees have a lower life expectancy, this could actually be the smartest decision to make.

Unless there is greater equality throughout the economic life of workers, it is unlikely that social security will be able to adjust to compensate for unequal benefits based on mortality. . Instead, it will be up to everyone to take steps to maximize their life and make their social security decisions accordingly.