Yes, Social Security is complex. But its complexity goes far beyond the taxes that support it and its thousands of rules. The complexities also go well beyond the nuances of benefit-taking decisions that armies of salesmen offering free dinners are eager to help us make. The real complexity works out in the ultimate currency, years of life.
One of the common complaints about Social Security is that it isn’t “even.” What you get in benefits isn’t proportional to the amount you paid in employment taxes. In fact, the more you earn, the more likely some aspects of Social Security will irk you.
This isn’t irrational. Most people don’t understand that Social Security is a defacto graduated income tax. And it is a very steep graduated tax, at that. Built into the crediting formula for retirement benefits, the tax is far steeper than the taxes we pay on current income.This year the federal income tax has rates that start at 10 percent and peak at 39.6 percent. The Social Security benefits crediting formula has implicit rates that start at 10 percent and peak at 85 percent.
This isn’t a bad thing; it’s part of the original design. The intent was to provide a retirement income backup system for all Americans. Those who earn the least get more benefits for every dollar paid into the system than those who earn the most.
This year, for instance, the first $816 of indexed monthly wages gets credited at a 90 percent rate.Monthly earnings from $817 up to $4,917 are credited at a 32 percent rate. And monthly earnings over $4,917 credit at only 15 percent. What does this mean? Fortunate workers who earn more than $4,917 monthly pay 6 times as much in taxes on higher earnings to get the same increase in retirement benefits as a low wage earner receives.
The economic term for this is that Social Security is a progressive program. Those at the bottom of the wage pyramid get more for their employment tax contributions. Those at the top get less.
In fact, Social Security isn’t as progressive as it seems for a simple reason: The more you earn, the longer you are likely to live. We’re not talking months here; we’re talking years. And, as I’ve pointed out in other columns, the life expectancy difference between people with high earnings and people with low earnings is growing. Indeed,one study revealed that women with less than a high school education lost 4 years of life expectancy in a recent 20-year period.
Today, after decades of advance, we now have people who are losing ground while most are still gaining.The next battle over inequality won’t be about money; it will be about years of life.
A recent study by Barry Bosworth and Kathleen Burke at the Brookings Institution lays it all out. Examining years of survival after age 55 by income decile, the researchers found major differences in life expectancy. Men in the bottom ten percent could expect to survive another 24.2 years and collect benefits for 18 years. They had a life expectancy of 79.2 years and tended to take Social Security benefits before full retirement age.
Men in the top earning decile could expect to live another 34.3 years and collect benefits for 25 years. They had a life expectancy of 89.2 years.
At every decile between the bottom and the top, the number of survival years increased. Ditto the benefit years. The same applied to women, but the differences were less dramatic.
Given these figures, it appears the reward for earning more money isn’t mere money. It’s a longer life. In this case, the years-of-life gap between the bottom and the top is 10 years, a full decade. Having a longer life leads to collecting Social Security benefits longer. In this case, the increase is 7 years— from 18 to 25 years. That’s an increase of 39 percent.
Does it overwhelm the progressivity of the Social Security system? No. But the end result is a lot more even-handed. You can decide whether that’s the way it’s meant to be.
And the marching orders for you and me? Earn more and earn longer. If you do, you’ll probably have the time to enjoy it.