Examining Social Security’s Effects on Distribution of Benefits and Taxes

Under Social Security, retired workers can receive benefits at age 65 that  equal about 50 percent of pre-retirement earnings for an illustrative  worker with relatively lower earnings but only about 30 percent of  earnings for one with relatively higher earnings. Other such  program features include provisions for disabled workers, spouses,  children, and survivors. Changes in the program over time also affect the  distribution of benefits across generations. Today, I would like to share our  findings regarding how to define and describe “progressivity,” defining  appropriate benchmarks for assessing the future outlook for individuals’  Social Security benefits, what factors influence the distributional effects of  the current Social Security program, and how various reform proposals  might vary in their distributional effects. Different Distributional Measures Reflect Different Perspectives

Two distinct perspectives on Social Security’s goals suggest different  approaches to measuring progressivity. Both perspectives provide  valuable insights. An adequacy perspective focuses on benefit levels and  how well they help ensure a minimal subsistence or maintain pre- entitlement living standards. An equity perspective focuses on rates of return and other  measures relating lifetime benefits to lifetime contributions. Note however that equity measures cannot accurately assess  the distributional effects of reform proposals that rely on general revenue  transfers. Program’s Distributional Effects Reflect Various Program Features and Demographic Patterns

Social Security’s distributional effects reflect program features, such as its  benefit formula, and demographic patterns among its recipients, such as  marriage between lower and higher earners. The disability benefit formula also favors lower earners, and  disability recipients are disproportionately lower earners. Household formation tends to reduce the system’s tilt toward  lower earners because some of the lower-earning individuals helped by the  program live in high-income households. Also,  differences in mortality rates may reduce rates of return for lower earners,  as studies show they may not live as long as higher earners and therefore  would receive benefits for fewer years. For example, Model 2 of the President’s Commission to Strengthen Social  Security (CSSS) proposes a new system of voluntary individual accounts  along with a combination of certain benefit reductions for all beneficiaries  and selected benefit enhancements for selected low earners and survivors. According to our simulations, the distribution of benefits under Model 2  could favor lower earners more than the distribution of benefits under  either currently promised or currently funded benefits. Again, this  assumes that all account participants would invest in the same portfolios. Social Security: Long-Term Financing Shortfall Drives Need for Reform  (GAO-02-845T, June 19, 2002).
Why GAO Did This Study

Under the current Social Security benefit formula, retired workers can receive benefits at age 65 that equal about 50 percent of preretirement earnings for an illustrative low-wage worker but only about 30 percent for an illustrative high-wage worker. Factors other than earnings also influence the distribution of benefits, including the program's provisions for disabled workers, spouses, children, and survivors. Changes in the program over time also affect the distribution of benefits across generations. Social Security faces a long-term structural financing shortfall. Program changes to address that shortfall could alter the way Social Security's benefits and revenues are distributed across the population and affect the income security of millions of Americans. The Chairman of the Senate Special Committee on Aging asked us to discuss how selected Social Security reform proposals might affect the distribution of benefits and taxes.

What GAO Found

Two distinct perspectives on Social Security's goals suggest different approaches to measuring "progressivity," or the distribution of benefits and taxes with respect to various earnings levels. Both perspectives provide valuable insights. An adequacy perspective focuses on benefit levels and how well they maintain pre-retirement living standards. An equity perspective focuses on rates of return and other measures relating lifetime benefits to contributions. Both perspectives examine how their measures are distributed across earnings levels. However, equity measures take all benefits and taxes into account, which is difficult to calculate for reform proposals that rely on general revenue transfers because it is unclear who will bear the relative burden for those general revenues. The Social Security program's distributional effects reflect both program features and demographic patterns among its recipients. In addition to the benefit formula, disability benefits favor lower earners because disabled workers are more likely to be lower lifetime earners. In contrast, certain household patterns reduce the system's tilt toward lower earners, for example, when lower earners have high-earner spouses. The advantage for lower earners is also diminished by the fact that they may not live as long as higher earners and therefore would get benefits for fewer years on average. Proposals to alter the Social Security program would have different distributional effects, depending on their design. Model 2 of the President's Commission to Strengthen Social Security proposes new individual accounts, certain benefit reductions for all beneficiaries, and certain benefit enhancements for selected low earners and survivors. According to our simulations, the combined effect could result in lower earners receiving a greater relative share of all benefits than under the current system if all workers invest in the same portfolio.