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of months in 35 years) to calculate the Average

Table 1

Indexed Monthly Earnings (AIME). The

Progressivity of Social Security Benefits

Primary Insurance Amount (PIA), which in

most cases is one's initial monthly benefit if

Annual

Initial Monthly

Benefit as a

retiring at the normal retirement age, is then cal-

Year of

Earnings

Social

Percentage

culated using bend points, the primary determi-

Year of

Retire-

Prior to Year of

Security Benefit

of Last Year's

nant of the system's progressivity. As an exam-

Birth

ment

Retirement

(NRA)

Labor Income

ple, a worker who turned 62 in 1996 would use

Low

Maximum

Low  Maximum

Low Maximum

the following formula to determine his initial

Wage

Wage

Wage

Wage

Wage

Wage

monthly benefit:

1930

1995

$12,539 $63,979

$581

$1,266

56%

24%

1950

2016

$14,897 $72,280

$668

$1,661

54%

28%

· 90 percent of the first $437 of AIME, plus

· 32 percent of AIME in excess of $437 but

1970

2037

$17,867 $86,598

$799

$1,994

54%

28%

not in excess of $2,635, plus

Note: It is assumed that each worker starts work at age 21 and retires at the normal retirement age

· 15 percent of AIME in excess of $2,635.

(NRA) as stipulated by law (for the 1930, 1950, and 1970 birth years the NRAs are 65, 66, and 67,

respectively).3 Low wage is defined as 50 percent of the national average wage and maximum wage is

As is clear from the formula, benefits as a per-

the maximum earnings subject to the OASI tax. All figures have been converted to real 1997 dollars

centage of earnings fall as wages rise, yielding

using actual and projected levels of the Consumer Price Index.4

higher returns for lower-income workers. Table

1 shows this for low- and maximum-income

workers born in 1930, 1950, and 1970.

because of their low, or even zero, marginal tax

Despite this, the system may not be as pro-

rate. Finally, given that benefits are based on 35

gressive as it appears. Some experts have point-

years of work history, low-income workers, who

ed out that low-income workers start their

have more periods of unemployment, receive

careers at an earlier age than do high-income

the same benefits as other workers with the

workers, and have a shorter life expectancy.

same income but many more years of work.

Therefore, low-wage workers receive back

Whether these differing views of progressivity

fewer benefits over their lifetime compared to

cancel each other out or not is subject to debate,

what they pay in than do wealthier workers.5

but there is no question that the benefit formula

The RAND Corporation found that while Social

itself is progressive. Because it is assumed that

Security benefits retain some degree of progres-

without redistribution lower-income workers

sivity, taking into account such factors as mari-

would be worse off, the preference for redistri-

tal status and life expectancy shows that "the

bution is one of the arguments against market-

OASI system is not as progressive" as generally

based financing.

The RAND

believed.6  Indeed, the study found that for

One test of this hypothesis is to compare

unmarried men, the rate-of-return among high-

Social Security benefits to simulated market

Corporation

wage earners was actually higher than among

benefits for the same low-income workers as

found that

low-wage earners, making Social Security

above. We will assume that each individual

Social

regressive for that category of recipients.7

starts working at age 21, retires at the normal

The RAND study also concluded that the cur-

retirement age (NRA), and lives to the average

Security is not

expected life span of the population aged 65.10

rent benefit structure disadvantages African-

as progressive

Americans, who have lower life expectancies

Low-income is defined as annual earnings equal

as generally

and marriage rates. According to the study,

to half the national average wage, about $13,366

whites consistently earn higher rates of return

in 1997. For each worker only the combined

believed.

than blacks.8 In fact, on a life-time basis, the

employer and employee OASI tax stipulated by

income transfer from blacks to whites is as

law is invested. These taxes are shown in

much as $10,000.9

Appendix A.

Market-based benefits assume the OASI

Others counter by noting that the system

taxes are invested exclusively in stocks or

retains its progressivity because lower-wage-

bonds. The stock portfolio contains 90 percent

earning workers tend to have more menial and

large capitalization stocks and 10 percent small

physically stressful jobs, leading to higher rates

capitalization stocks, comparable to the mar-

of disability and, therefore, benefits. Also, their

ket's capitalization presently. The bond portfo-

families often have just one wage earner, yield-

lio is an equal weighting of government and

ing higher spousal benefits. In addition, benefits

corporate bonds. Actual annual returns through

are taxed using progressive income tax rates,

1996 were used. The average annual nominal

leaving them with higher after-tax benefits

3