Income Inequality Hurts Social Security

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by Michael Burgess

A new study from Stanford University shows that income inequality   s undermining the progressively of Social Security benefits.    Social Security has a degree of progressively built into the benefits formula.  In other words lower wage workers have a higher percentage of their incomes replaced than those with higher incomes.  However, this progressively is being undercut by income inequality.

As income gaps have widened, annual benefits for Social Security for higher income persons have grown faster than for middle and lower income persons.  This has eroded the progressivity formula.  Adding to the income inequality, men with the highest incomes, the top 1% of earners, live to an average age of 87 versus 78 for a person with $30,000 income, according to the study.  With an average of nine additional years of benefits, this fact also undercuts the value of Social Security’s progressive structure.  Since the program is intended as insurance, those who die younger don’t reap the benefits of those with longer lifespans and they also subsidize the benefits for those living longer.

Lower income men are not seeing their lifespans increase as much and their lifetime Social Security benefits are actually not increasing  like in previous years because of wage stagnation.  The Times reported, “A study published this year … found that life expectancy for the bottom 10 percent of male wage earners turning 66 this year has risen 0.7 of a year compared with what was expected for their low-income counterparts 30 years ago. For the top 10 percent of male wage earners, however, life span rose 8.1 years in the same period.”

These studies could have a big impact on public policy debates on Social Security because they point to changes benefitting more affluent persons.  There could be more calls to cut the benefit formula for higher income beneficiaries and increase the earnings cap subject to Social Security taxes which is currently $118,500.  The new study should also be used to oppose efforts to raise the retirement age to 70 as some conservatives have proposed on the theory that all put are living longer.  However, raising the age would hurt  lower income persons the most since their longevity is not increasing much at all.