A Stitch in Haste

The Urban Institute, a think tank whose research I have cited favorably in the past, has unfortunately engaged in a bit of myopic tap dancing around the question of how fair or unfair Social Security is to: (a) the working poor, (b) minorities and (c) the intersection of those two sets (which is large):

Still, consider the extreme case of George, who is in poor health throughout his life, works for a firm for 30 years, gets no survivor benefits, and dies at eligibility age. The firm would pay George zero pension benefits. Meanwhile, Paul, who is in very good health and can expect to live a long life, receives substantial pension benefits. The discrimination isn't just among individuals, like George and Paul, but also among groups. Blue-collar workers might do worse than white-collar workers and blacks worse than whites.

No argument there. Defined benefit pension plans -- including of course Social Security -- are a terribly risky retirement vehicle for workers cum retirees and their families. It may work out great if you enjoy a lengthy retirement (e.g., my father, who has now been "a retired New York City cop" longer than he was "a New York City cop"). But die the day after you retire, and your family gets bupkes.

Moving on:

Social Security shows us that it is possible to deal with this type of discrimination through offsetting mechanisms. For instance, Social Security has a progressive benefit formula that provides higher benefits relative to past lifetime earnings (higher "replacement wages") to those with lower-than-average lifetime earnings. Because lower earnings are correlated with lower life expectancy, people from educational, racial, and other groups with lower life expectancy are more likely to get equal returns on their Social Security contributions or taxes.

Of course, what UI creatively calls "offsetting mechanisms" has a more succinct (and intellectually honest) name: progressive taxation. Despite the blather of liberals who insist that Social Security taxes are regressive -- i.e., due to the (ever-increasing) wage cap -- in fact Social Security as a program (the only honest way to view it) is extremely progressive: a worker who, all else equal, pays twice as much Social Security taxes receives far less than twice as much Social Security benefits. That is a progressive redistribution scheme, pure and simple. Why not call it such? (Note also that progressive income taxation of Social Security benefits when paid compounds the progressivity even more on an after-tax basis -- see this post.)

In any case, the Great Contradiction of Social Security remains completely unaddressed by its apologists: Given that the working poor (and then some -- the lower 50% of all households) pay no federal income tax but do incur a 15.3% payroll tax, shouldn't anyone who claims to champion those same working poor (e.g., John "Class Warfare" Edwards) worry a whole lot less about income taxes* and a whole lot more about Social Security reform, with voluntary partial privatization at the top of the agenda?

Raising federal income taxes doesn't remove the riskiness of Social Security to the working poor. Eliminating the wage cap on FICA taxes doesn't remove it. Making the benefit formula even more progressively redistributionist doesn't remove it. Only reform, true reform that creates a bona fide vested and growing asset account to the worker/retiree and her family, can offset the fundamental risk of Social Security as a defined benefit program.

One last thought: The most disadvantaged minority group within the context of this analysis (i.e., the ability to leave something to survivors and dependents in the event of a premature death) are of course gays: Federal DOMA precludes any Social Security survivor or spousal benefit to same-sex partners -- even Massachusetts-married gay couples. Where, I wonder, do the major gay rights groups stand on Social Security reform?

---

*If taxes are higher tomorrow than they are today, then that's a tax increase. Politicians who prefer to call it "repealing a tax cut" are not only moral defectives but also linguistic defectives.