In light of all of the worrying about sequestration, entitlement reform – of course – goes undiscussed. While trimming around the edges of discretionary spending has sent people into a panic, the $100 billion in cuts are a drop in the bucket compared to the growing expenditures of the mandatory spending programs Social Security and Medicare.
In December NCPA senior fellows Andrew Rettenmaier, Thomas Saving and Texas A&M research scientist Liqun Liu published a study on the progressivity of Social Security benefits. The Social Security system by design is progressive, meaning that retirement benefits will replace more of a low-income worker’s salary than they will a high-income worker’s salary. However, according to Rettenmaier, Saving and Liu, this progressivity is somewhat diminished by the changing life expectancy (at age 65) of high-income and low-income men. Using county-level data, they find:
- While life expectancy has increased for men since 1970, it has risen even faster for high-income earning men.
- Between 1970 and 2009, life expectancy for men at the low end of the income distribution (10th percentile) rose 32 percent.
- During the same period life expectancy for men at the high end of the income distribution (90th percentile) increased 43 percent.
- Men in high-income counties live about 1.1 years longer than men in low-income counties.
Currently Social Security benefits are determined by a
worker’s highest earnings over 35 years and the growth of average wages. Because wages generally rise faster than prices, however, a formula based on price growth may mitigate the differences in life expectancy with respect to benefit payouts and also reduce the cost of the program. Low-income workers’ benefits would be indexed by wages while high-income workers’ benefits would be indexed by changes in
price level. This would help retain the progressivity of Social Security while reducing the growth in costs.