Summary and Introduction:
The Social Security benefit formula has incorporated some measure of progressivity almost since the program’s inception. As early as 1939, amendments to the original Social Security Act stipulated that monthly benefits replace a higher proportion of preretirement earnings for people with lower earnings compared with those with higher earnings (Martin and Weaver 2005). Throughout the program’s history, benefit adequacy—promoted through a progressive benefit formula—has been balanced with equity, the goal that benefits increase with contributions.
Although the Social Security retirement system is designed to replace a higher percentage of earnings for lower-income workers and their dependents,1 the degree to which the program actually achieves progressive outcomes is less certain. To contribute to our understanding of this issue, this paper introduces a new measure—a progressivity index—to estimate the progressivity of the Social Security retirement program. Our purpose is to develop a comprehensive, easy-to-understand summary measure for evaluating the magnitude of progressivity under Social Security within cohorts and for assessing potential shifts in systemwide progressivity as a result of policy changes.
Social Security progressivity can be described in various ways. For the purposes of this paper, we define progressivity as the degree to which benefits are higher relative to lifetime payroll contributions for lower contributors than for higher contributors. This definition can be related to Musgrave and Thin’s note (1948) regarding the income tax:
It is generally agreed that a rate structure is progressive where the average rate of tax (i.e., tax liability as a percentage of income) rises when moving up the income scale; proportional where the average rate remains constant; and regressive where the average rate falls with the rising income.
Progressivity under the Social Security program, which both levies taxes and provides benefits, is necessarily more complex than for income taxes. While this paper’s definition of progressivity is just one approach, and others have merit, the definition used here appears to be consistent with Social Security’s program design.2
The progressivity index compares the distribution of the present value of lifetime benefits to the distribution of the present value of lifetime taxes. We apply this index to microsimulation data from the Social Security Administration’s (SSA‘s) Modeling Income in the Near Term (MINT) model and estimate progressivity under the program for those born between 1926 and 2017.3 Results indicate that Social Security is modestly progressive on a lifetime basis; currently, the program lies approximately halfway between paying a benefit directly proportional to lifetime taxable earnings and paying a flat dollar benefit to each retiree. Although the program’s progressivity has declined in recent decades, it is projected to remain roughly constant in the future, according to the index. Overall, the paper extends previous research by introducing a comprehensive, easy-to-understand summary measure that can evaluate Social Security’s progressivity among current and future retirees or as a result of policy changes.
The paper begins with a review of the methodological techniques often used to measure progressivity under the Social Security program. We then introduce the progressivity index, describing how the index is calculated and how results can be interpreted. Next, the progressivity index is applied to MINT data of the Social Security population. The magnitude of progressivity under the current Social Security program is estimated and compared with two stylized hypothetical programs with high and low progressivity. This is followed by an examination of progressivity for future retirees. To demonstrate the index’s potential utility in evaluating policy changes, the final section calculates the effects of several commonly cited Social Security policy changes on the system’s progressivity.