What Is the Insurance Value of Social Security by Race and Socioeconomic Status?

Social Security’s design is known to help Black individuals and those with lower socioeconomic status due to the progressive benefit formula, but this effect is partially offset by the shorter life expectancies of these groups.  However, valuing Old-Age and Survivors Insurance (OASI) solely on expected benefits neglects the program’s longevity insurance value, which favors individuals facing greater uncertainty over their lifespans.  This paper uses a structural model to measure the value of the program’s longevity insurance for stylized households that differ by race, education, and marital status.  Wealth equivalence calculations indicate that all stylized households value OASI at least as much as their lifetime OASI tax contributions.  The results also indicate that Black households derive more longevity insurance value from OASI than their White counterparts.  Hence, OASI increases racial equity in retirement even more than suggested by measures based on expected benefits alone.  

The paper found that:

• In a simple lifecycle model, all stylized household types value OASI at least as much as their lifetime contributions to the program.
• Black households value OASI more highly than their White counterparts, both overall and in terms of excess valuation over expected benefits.
• Generally, the valuation of OASI beyond expected benefits strongly correlates with the unpredictability of longevity.   

The policy implications of the findings are:

• At least in this simple model, all stylized households would be willing to pay higher FICA taxes to fund the current OASI system.
• Black households stand to lose more than White ones from proportional reductions in benefit generosity.