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

September 28, 2023
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Working Paper by Karolos Arapakis, Gal Wettstein, and Yimeng Yin

Abstract

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.
Senior black woman calculating her retirement annuity at home
Senior black woman calculating her retirement annuity at home
Author(s)
Headshot of Karolos Arapakis
Karolos Arapakis
Headshot of Gal Wettstein
Gal Wettstein
Headshot of Yimeng Yin
Yimeng Yin
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Citation

Arapakis, Karolos, Gal Wettstein, and Yimeng Yin. 2023. "What Is the Insurance Value of Social Security by Race and Socioeconomic Status?" Working Paper 2023-14. Chestnut Hill, MA: Center for Retirement Research at Boston College.

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Associated Project(s)
  • BC23-Q1
Topics
Racial Disparities
Social Security
Publication Type
Working Paper
Publication Number
WP#2023-14
Sponsor
U.S. Social Security Administration
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