Daniel Hemel: "Is Social Security Tilted Toward the Rich?"

Is Social Security Tilted Toward the Rich?

A fascinating column in the New York Times Sunday Business section claims that the growing life span gap between the rich and the poor is undermining the Social Security system’s redistributive design. Neil Irwin writes:

[A]n American man who is consistently in the top 1 percent of earners — making $2 million last year — will, if he starts taking Social Security benefits at age 66 and lives to be 87, end up with more money than he and his employers paid into the system in taxes during his lifetime. In the language of finance, he would receive an inflation-adjusted “internal rate of return” of 1.07 percent.
By contrast, if a member of Mr. Moneybags’s household staff, born the same year, made about $30,000 annually and also lived to be 87, he would receive a 2.57 percent return after inflation. . . . Alas, a gardener earning $30,000 a year is unlikely to live that long. Men in that income tier die, on average, at age 78. . . . If the gardener died at [age 78], he would lose about $115,000 in benefits, compared with what he would receive if he lived as long as the wealthy man. And he would earn a 0.92 percent rate of return on his tax dollars — a bit lower than that earned by his much wealthier boss.

The Times’ analysis, if correct, is quite dispiriting for those of us who favor greater redistribution of wealth and considered Social Security to be a great progressive achievement. But is it correct? I’m doubtful. That’s because — as best I can tell — the Times’ analysis fails to account for the tax treatment of Social Security benefits. And once one accounts for the taxation of Social Security benefits, the system begins to look a lot more progressive than the Times’ analysis suggests.

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