Social Security Complexity Makes Reform Harder

It is difficult to imagine that the discussion of Social Security reform could get more divisive — but it is likely so.

Over the last month, the National Bureau of Economic Research and the Center for Retirement Research published reports on the impact of life expectancy on Social Security.

I can’t attest to the accuracy of the projections, but I am confident that both reports will make Social Security reform more complicated.

Both reports tended to question one of the bedrock foundations of the program — its progressivity. In other words, it's universally available to workers at pricing that is subsidized by those who can afford it the most.

Social Security is Progressive, Maybe Not

Social Security is by design a progressive system, one in which the wealthy pay more for their benefits than people who are less well-off. At the margins of the last $1,000 earned, a low-wage worker will get about $25 per year in annual benefits whereas the person working for $127,200 will get close to $4.

This strategy achieves the goal, provided that the length of retirement is roughly the same across seniors. The research opens that assumption to question, with one study going as far as to suggest that the program has evolved into a public dole for the rich.

The NBER study said for people who are 57 today there is a $130,000 gap in benefits between those who earned a lot of money and those who didn’t because longer lifespans translate into more benefits.

Delayed Retirement is the Rage

This differential does not include the bonus that is collected by people who delay their claiming date. Delaying benefit claims has become the rage on the Internet. It's the in thing to do. While the Internet makes it sound complicated, it is really as simple as people betting small on outliving the average. Over an average lifetime, even the winners do not make much.

This research suggests, however, that the game is fixed. First, delayed retirement credits really serve those who either through wealth or earnings can afford to shift their Social Security benefits later in life. This means it is primarily a service for the affluent. Second, the pool isn’t average. The implication here is that many of these seniors will outlive the average where the payoff stops being small.

The Individual May Make Money

In terms of the individual it is easy to take either side of whether seniors should delay their claim because the break-even point depends upon a lot of variables. In the case of the program itself, however, Social Security loses money on the transaction even in the most favorable case which is a single male who lives to expectation.

The Program as a Whole Loses Money on the Deal

In a differed claim, Social Security keeps the money that would cover a year of benefits in the trust fund. That investment pool earns a little more than 3 percent interest today. In order to break-even on the transaction, the program has to earn between 3.5 and 4 percent inflation adjusted. Unless we see deflation over the next decade, Social Security will lose money on these transactions.

A Thorny Subject Gets More Complicated

In a discussion where there is little agreement, lifting the retirement age has been one of the few options that politicians from both parties at least could consider. As a policy option, lifting the age of admission has appealed to politicians in part because the concept is easy to explain, and in part because impact falls decades away on people who can’t vote against them today.

As the public starts to see the impact of the data, it will be even more difficult to find a middle ground on the issue of the programs finances. Welfare for the rich is a tough sell in any political environment, much less today’s bipartisan atmosphere. Moreover, as the finances of the program erode, the benefit level of those who deferred claiming will grow more visible with every passing year.

The debate of Social Security, already a thorny topic, will grow more complicated as the results of recent research on life expectancy inequality flow into the debate about the program's finances. More complexity is the last thing needed in discussions about Social Security.

Brenton Smith writes on all aspects of Social Security reform, translating the numbers and jargon of the issue into terms that everyone can understand. His work has appeared in Forbes, MarketWatch, Fox Business, The Hill, and a number of regional newspapers. To read more of his reports — Click Here Now.