One of the few bulwarks in the world against the increasing inequality separating rich and poor has been Social Security.
The program is broadly progressive, meaning it’s relatively more beneficial for lower-income recipients. But that’s changing, mostly due to a widening gap in life expectancy between rich and poor. Although higher-income folks receive lower monthly benefits relative to their lifetime earnings than lower-income workers, they collect benefits for longer periods on average simply because they live longer.
The trend has triggered a debate among Social Security advocates about how to restore the program’s traditional balance. Among the ideas getting batted around is reducing the credit for delayed retirement.
For instance, baby boomers born between 1943 and 1954 currently receive full benefits at age 66, but receive a larger monthly payment for each month they hold off collecting checks after that. For those who delay collecting until 70, the maximum, monthly benefits are 32% higher than if they started at 66. Since it’s higher-income workers who generally have the flexibility to delay Social Security, this is adding to their unequal advantages.
The widening mortality gap is documented in a new paper from the Center for Retirement Research at Boston College, based in part on statistics from the Social Security Administration.
The trend doesn’t mean that Social Security has turned into a regressive program that benefits high-income people more than those in the middle- and low-income segments, observes Matthew S. Rutledge, the paper’s author. But it does reduce the system’s progressivity, he says.
“The lowest socioeconomic groups are being penalized for something that’s really out of their control,” Rutledge told me.
The program’s actuaries found that men with above-median earnings born in 1912 lived about a half-year longer after age 65 than those with below-median earnings. But among those born in 1941 — that is, men who turned 65 in 2006 — the higher-income group lived an average of more than five years longer after 65 than their lower-income compatriots.
A similarly widening gap has been seen between the most educated and least educated workers, a rough marker of lifetime income.
Experts believe that the differences are due to health, though they’re not entirely sure about all the factors that account for better health among the better paid. Higher-income Americans have experienced a relatively steeper decline in deaths from cancer and cardiac conditions, according to Rutledge’s paper, conceivably due to greater reductions in smoking among that group. But that only accounts for about half of the relative improvement in mortality. The rest may be due to better healthcare, healthier lifestyles or better lifelong health — or to factors that haven’t yet been pinpointed.
Social Security experts observe that disability, spousal and survivor benefits tend to enhance the system’s progressivity even in the face of the mortality gap, since they’re typically paid to households vulnerable to the untimely retirement or death of a breadwinner. But it does appear that the mortality gap has given higher-income retirees a Social Security bounty.
A study cited by Rutledge found that among the highest-earning 20% of workers, average lifetime Social Security benefits rose to $295,000 for those born in 1960 from $229,000 for those born in 1930; for the lowest-earning 20%, however, average lifetime benefits fell to $122,000 for the 1960 birth cohort from $126,000 for those born in 1930.
These figures are important because Social Security is designed to provide more help in retirement for lower-income than higher-earning workers. That has remained true even though lower-income workers pay a higher rate in Social Security tax than the wealthy.
The delayed retirement credit has been getting more attention as a means of redressing the mortality imbalance in part because it’s so clearly a boon for wealthier workers. The credit is set at 8% for every year of deferral. Those taking early retirement — that is collecting benefits prior to their normal retirement age — receive less per month; those in the 1943-54 birth cohort who take benefits starting at the earliest claiming age of 62, or four years earlier than normal retirement at 66, would receive monthly benefits reduced by 25%.
In other words, for those due an average monthly stipend of $1,400 upon retirement at age 66 in 2018, those who wait until age 70 would receive about $1,848 per month until their death, and those who start early at age 62 would receive $1,050. The credits and penalties have been set to be actuarially equivalent so that on average, no one would receive more or less in lifetime benefits, since those receiving more per month would collect for a shorter period, and those receiving less would collect for longer.
The mortality gap has thrown the actuarial calculation off, however, because those collecting late are also living longer. “There’s concern about the delayed retirement credit because the people able to wait are people we don’t need to help,” Rutledge says.
Reducing the credits and penalties wouldn’t be hard to work out mathematically, Rutledge says, because the data needed to make the adjustments already are in the Social Security Administration’s hands.
But the people who would be most disadvantaged tend to have the strongest political voice. It’s also true that many retirees and near-retirees have made their retirement choices based on the existing credits and penalties, and it wouldn’t be fair to change the rules for them. That means that any alteration probably can’t be implemented in the near term.