Yes, Social Security picks winners and losers – Twin Cities

The benefits end of Social Security is highly tilted in favor of low-income people. That is good.

But it also is based on and favors a 1940s’ model of most people marrying young and having multiple children quickly — with the wife largely working at home.

Moreover, it favors people living in generally low-wage, low-cost geographic areas. U.S. citizens need to understand all this as we contemplate changing the system.

All this builds on last week’s column, where we discussed how myths about the system distract — intentionally or not — from hard discussions among our politicians about real problems and real solutions. You might look that column up online as we dive into Part 2.

The key to this progressive structure is that the “return” people get in retirement, relative to FICA taxes they paid during their working years, is not the same for everyone. Understanding this is essential.

Lower-income people get high returns, and that drops off as working-year income rises. People sometimes hear a high-income person complain that their benefits will be lower than if their FICA had gone into the stock market. Listeners assume it is true for themselves also. It isn’t, first because the complainer probably ignored many factors in their computations, as we discussed last week, but also because “benefits” relative to “contributions” vary greatly across income levels. At its core, Social Security is an income redistribution program and this continues into our retirement years. It’s designed for low-income people to do the best.

Still, considering all benefits, survivors, disability protection and misunderstood retirement sums, most Americans of all income levels get a higher return on Social Security than they think they do. Part of that stems from ignorance of how retirement benefits are computed.

For a clear explanation of how this is computed, search the internet for Social Security benefit amounts. That page, at the Social Security Administration website, and ones linked to it, lay procedures and issues out in detail.

The upshot is that, if your monthly payment is $1,000, your benefit is 90% of what you averaged in wages. If it is $1,500, this “replacement ratio” is 56%. And at benefits of $2,000, $2,500 and $3,000 the ratios are 47%, 43% and 37% of average working-life earnings replaced respectively.

From a different perspective, if you earned $10,000 a month, your replacement is 36.3%. For an executive getting $50,000 monthly, it would be 7.3%. And a CEO earning $12 million a year gets under four-tenths of 1%. Regardless of how it is computed, the logic is simple: If you’re rich you don’t need as much money from the government in retirement as if you’re poor, or at least you shouldn’t; the math is there to guide us through the process equitably.

Also understand that someone, perhaps married to a high-income earner, puts in one intense 60-hour week a year as a $250-an-hour consultant, their “average indexed monthly earning,” and benefit earned, would be the same as someone who worked 40 hours a week at the federal minimum wage over a 52-week year. A highly skilled computer engineer initially in this country on an H1-B visa might have high enough earnings in 12 years to have a benefit equal to someone who worked 45 years as a high school teacher or bank loan officer.

An important point also is that the incomes transfer not only from rich to poor and young to old, but from place to place.

For rural Midwest states like ours, earnings are generally lower, but so is the cost of living. If you get a $900 Social Security check in Ellsworth, Minn., or Bruce, S.D., and retire with a paid-for home, you are far from rich, but you can be comfortable. If you have a $900 check, live as a renter in San Francisco or the District of Columbia, your poverty is extreme.

Average Social Security payments in rural areas are modest, but have a high replacement ratio because of the progressivity of the “bend point formula.” A $900 check is down only $100 from average earnings from work. Because of this, someone getting $900 receives substantially more than the actuarial value of what they paid in. Under a different system, such as one with “personal accounts,” their check would be far lower.

Estimating the effects of other possible systems on earnings is complicated. Some people work in cities but return to the country to retire and vice versa. One may spend 20 years as a city employee in Denver and 25 more farming in Lincoln County. In any county, benefits paid out now are based on FICA paid in the past. FICA paid now is for future benefits.

So exact estimates of average actuarial values of FICA paid versus benefits are very hard. However, quite good, although unfortunately unpublished, research showed that if rural county recipients got the actuarial value of what they had paid in, total Social Security payments in most such counties would drop by over 40%.

There are huge fiscal transfers from urban counties and largely urban congressional districts to rural ones. And Social Security and Medicare are the largest factor in these transfers. With thinning and aging populations, Social Security is the largest single source of cash income in many counties, higher than net profits from farming. Just saying this would prompt screaming, angry responses, but rural voters need to accept this when their representatives call for changes in Social Security or they will shoot themselves in their kneecaps.

Understand also that disability benefits are of greater importance in non-metro areas because a higher percentage of jobs are ones in farming, building construction, earthmoving, trucking, meatpacking and others that are far more dangerous or physically taxing than white collar jobs in cities. And it is hard to transition from such jobs in middle age to ones involving sitting at a computer.

It is not just injury. Age-specific death rates, particularly for men, are higher in rural areas than urban ones. So the factor of survivors’ benefits is substantially more important.

Social factors play in as well. Since the program’s beginnings, age at first marriage has generally gotten higher and “completed family size” has dropped. But historic subtle provisions that favored “Father Knows Best” traditional families are still more important where marriage remains more common among younger people and where “completed family sizes” are higher.

Note that these considerations don’t just apply to rural-urban comparisons. Survivor’s benefits were important protections to June, Wally and the Beaver in case Ward Cleaver died. They are of far less importance to today’s children and grandchildren of retirees, whether baristas or medical device designers, who are marrying much later and having fewer children. And the relative fairness of young people earning tons of money over a few years in Silicon Valley or Seattle getting the same benefit as people who toiled at lower wages for nearly half a century is not an issue that either liberals or conservatives should ignore.

Two lessons: First, the siren song of “fixing” Social Security through private, personal accounts would be disastrous for future low-income workers. Secondly, our society’s values and how we pay for them have changed and will continue to. Policies regarding disability, survivorship and family relationships that were right for 1935 may be wrong today. And the averaged-indexed earnings — bend point formulas which evolved in the 1970s and 1980s — have unintended and perhaps unfair outcomes also. Both need examination. However, they probably will be ignored if the rusty overall fiscal can gets just kicked a bit further down the muddy road.