Longevity Affects Social Security Benefit
It’s long been known that people with high earnings tend to live longer than low earners. But this gap in life expectancy has widened into a gulf.
For example, high-earning men born back in 1912 lived about eight months longer than their counterparts in the bottom half of the income range. This longevity gap increased to five years for men who were born in 1941 and are now in their late 70s. The disparity for women is similar, but not as extreme.
This growing longevity gap has important implications for Social Security. The program’s intent is to be progressive – more generous to lower-income retirees. But the unequal life spans have significantly reduced that progressivity, concludes Matt Rutledge in a new synopsis of research in this area for the Center for Retirement Research, which sponsors this blog.
The reason low-income workers are losing ground is that they don’t live as long, so they don’t collect Social Security for as many years as high-income workers do.
A study by the National Academy of Sciences, one of several demonstrating the decline in the program’s progressivity, found that the value of lifetime Social Security benefits, adjusted for inflation, increased nearly 30 percent for the highest-income retirees born in 1960, compared with the top earners born 30 years earlier. But benefits either fell or stagnated over that time for retirees on the lowest two tiers of the income scale – the people who rely far more on Social Security.
Although the reasons for the differences in life expectancy, depending on one’s income, aren’t fully understood, various studies explain some of them. High-income people are healthier and can afford better medical care, resulting in a lower risk of dying of cancer or heart conditions. Their smoking rate has also declined, reducing the incidence of related conditions like lung cancer and heart disease.
Some of the most interesting research has dug deeper into the impact of the quality of the conditions people are living in. Low-income people, one study finds, will live longer if they reside among high-income residents in areas with higher housing costs and a college-educated population. Other influences are behavioral. It’s healthy to see people around you who don’t smoke, aren’t obese, and have good exercise practices. The larger tax base in higher-income communities also provides more resources for government services.
In any event, despite the growing income-longevity gap, the same body of research finds that Social Security does continue to be progressive overall.
The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.
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The benefit progressivist estimate and historical comparisons should include income taxation of benefit, which was not intended originally and is pure double taxation
It may be helpful to compare Social Security to two common retirement savings programs, IRAs and 401(k)s. The employee pays no taxes as the amounts invested grow through dividends, interest, capital gains, etc. Each program may come in either of two versions: Regulars deduct the investment and are taxed on withdrawals; Roths are not deductible, but the withdrawals are not taxed.
Social Security, in effect, combines Regular and Roth. The half of FICA taxes paid by the employer are not taxed to the employee, in effect the treatment of a Regular (where the employee is not taxed because of the deduction). The other half of FICA paid by the employee is taxed to the employee, in effect the treatment of a Roth.
To make Social Security mirror Regular and Roth, half should be deductible/excludable and half not.
Quoting from this article, “But benefits either fell or stagnated over that time for retirees on the lowest two tiers of the income scale-the people who rely for more on Social Security.”
It seems fairly likely to me that retiree households in the bottom income tier are living pretty much only on Social Security and none of that would be subject to taxation.
My guess is that (i.e. none of SS is taxable) is also true for many or most in that second cohort either given their retirement income is low.
Worse case is 85% of Social Security is taxable (although that reality can have very bad consequences in terms of marginal taxation of say capital gains taken or IRA withdrawals made in a given year).
It’s certainly true that for those whose SS is taxable, that is double taxation and that was not originally intended.
However, it is also true that taxing SS is a way to “means test” SS benefits. Retirees with higher income are going to get 85% of their SS benefits taxed–thereby reducing the value of their SS benefit by the additional income tax they pay.
But rather than reducing their SS benefit (which would help the long term viability of SS (and be a transparent approach) SS benefits are paid and incomes taxes for those whose SS is taxable go to the federal budget as tax revenue.
Congress has absolutely made a hash of Social Security and Medicare Care. Both parties. Since the Greenspan Commission in 1983.
With no end in sight.
My husband was neither a high earner or a low earner. He died young (age 71) of cancer and I’m glad that he decided to take his SS benefit at 62. He was able to do what he liked best…buy a motor home and tour the country!
It appears such conclusions are based on projections that are challenging.
The article states “…study…found that the value of lifetime Social Security benefits, adjusted for inflation, increased nearly 30 percent for the highest-income retirees born in 1960, compared with the top earners born 30 years earlier.” Curiously, those born in 1960 are now 58 years old and haven’t even begun to collect Social Security benefits. To project inflation adjusted LIFETIME benefits requires multiple complex assumptions with any component being highly leveraged. Any minor variation in a single component may yield quite different conclusions.
I read the link, but not the related studies. Hopefully, those materials better explain the assumptions and methodology for the reader to determine the confidence level of such conclusions.
Dear JS – good catch!
You are absolutely right: people who were born in 1960 probably haven’t retired yet – including my brother
What the researchers did, and what I failed to clarify, is that the study compared the actual benefits for retirees born in 1930 with the PROJECTED benefits for workers born in 1960.
Thank you for reading the blog closely!
Kim – blog writer