Pensions in the U.S. - The Role of Social Security

A Brief Overview

Bismarck & Beveridge Club - Budapest

Presentation by

Martin B. Tracy, Ph.D.

Social Insurance Research International

1519 Canterbury Drive

Murray, Kentucky 42071-3250

USA

7 May 2007

Historic Context

Social Security pensions in the United States clearly play a significant role in the redistribution of income within a framework of individual equity and social adequacy.

What is the historical context for this role?

Committee on Economic Security

When President Roosevelt created the CES in 1934, he appointed a group of Wisconsin economists lead by Edwin Witte to develop the principles on which social security was to be based.

Committee on Economic Security

Influence of programs in other nations, as reflected in 4 reports prepared for the CES:– Financial History of the Worker’s Invalidity, Old

Age and Survivor’s Insurance of Germany – British Old Age Pensions and Old Age Insurance– Report on Canadian System– Old Age Pension Statistics by Wilbur J. Cohen

Wilbur J. Cohen

Special mention because of his influence in research and in understanding international policies, including conventions of the International Labour Conference, as well as principles of Bismarck and Beveridge

Instrumental in adding provisions to the SS Act to mandate continuing study of programs abroad

Major Principles Adapted to US Culture & Political Realities

1. Universal coverage

2. Compulsory coverage

3. An earned right to benefits/pensions

4. A contributory and self-financed system

5. Wage related contributions

Major Principles Continued

6. Old-age pensions that are not means-tested

7. A pension formula that redistributes contributions from higher paid to lower paid workers

8. Pensions protected against inflation

Opposing Distributional Measures

Opposite distributional measures reflect different perspectives as to purposes of SS:

Individual equity (a fair return on contributions)

Social adequacy (reduce dependency and poverty)

Individual Equity

Pensions based on a worker’s age and employment that are paid without regard to need

Pension formula that pays higher benefits to workers with higher earnings (a fair return on contributions)

Social Adequacy

A basic pension amount that favors lower paid workers – higher replacement rate for lower income workers

Favors workers with dependent spouses & children

Favors workers who are less healthy or who die before retirement

Progressive Formula

Progressive formula for calculating pensions gives a greater percentage of pre-retirement income to lower wage earner

For first dollar of average lifetime income, pension beneficiaries receive $0.90. At higher incomes, a $1 increase in average lifetime income adds only $0.15 to annual pension

Progressive Formula & Women

Under the pension formula women pay 39% of social security payroll taxes and receive 50% of social security pensions

For the median income woman retiree, social security replaces about 54% of average lifetime earnings, compared to 41% for the median male

Higher Risk for Women

Despite the advantages, women are at higher risk of poverty because of lower earnings, longer lives, and divorce when the marriage terminates before ten years

Married women are better off economically. Poverty rate for unmarried women is 4 times

as high as it is for married women

Policy Issues

Lack of understanding– Many still believe that social security is an

individual private savings account– Often perpetuated by politicians favoring

privatization– Little promotion of role of social security as an

instrument of social adequacy, social solidarity, social cohesion, or social capital

Privatization

Debate between equity and adequacy has been intensified by recent proposals to partially privatize social security

Such proposals have led to efforts by opposing groups to document the importance of the role of social security pensions in the distribution of income and in promoting social adequacy

Sources of Income

88% of persons 65+ receive social security 52% - interest income 31% - private pension 18% - earnings 8% - rents, royalties, estates, or trusts 3% - Supplementary Security Income

(welfare)

Distribution by Median Income

For median income persons 65+, social security is 67% of income

For age 75+ - 77% Non-married women – 84% African-American – 82% Hispanic – 84%

Majority of Income for Elderly

One-third of 65+ depend on social security for 90% or more of their income, especially low-income women and minorities

Sixty-five percent depend on social security for 50% or more of their income

Distribution to Lower Income Groups

Over 87% of income for 65+ with personal income under $10,000 is from social security

76% of income for persons with income between $10,000 and $20,000

20% of income for $50,000 to $75,000 9.6% of income over $75,000

Social Security and Poverty Rates

Without social security, 47% of Americans age 65+ would have income below the poverty line.

The poverty rate for white women would more than double

13 million Americans are kept out of poverty by social security

Rural Communities

People in rural communities rely on social security nearly twice as much as non-rural communities

Rural communities have a higher percentage of elderly persons, particularly women who are widowed or disabled

Rural Communities Continued

90% of communities with an elderly population of 20% or more are in rural areas

13% of rural elderly live in poverty compared to 9% in metropolitan areas

The state with the highest reliance on social security is the rural state of Arkansas with 77% for 65+ and 86% for 75+

Economic Benefit

Social security pensions are the economic lifeblood of rural communities, as small businesses depend on the purchasing power of the elderly

They are also the lifeblood of businesses in many low-income urban neighborhoods

Summary

Social Security pensions are critical for a majority of persons age 65 and over, especially women, minorities, and persons living in rural areas and low-income neighborhoods

Social Security pensions have been an effective instrument in redistributing income in the context of social adequacy, while maintaining the principle of individual equity