What
can Hispanic Americans expect in future Social Security retirement
benefits? A Heritage Foundation study reveals that the Social
Security system's rate of return for most Hispanic Americans will
be vastly inferior to what they could expect from placing their
payroll taxes in even the most conservative private
investments.
-
Social Security's low rate of return
cost Hispanic Americans potential retirement savings. If
Hispanic Americans were allowed to direct their payroll taxes into
safe investment accounts similar to 401(k) plans, or even in
super-safe U.S. Treasury bonds, they would accumulate far more
money in savings for their retirement years than they are likely
ever to receive from Social Security. For example, an
average-income single Hispanic male born in 1975 who earned about
$17,900 in wage, salary, and self-employment income in 1996 can
expect to receive an annualized real rate of return from Social
Security of just 1.44 percent. By contrast, he could expect to
receive a long-run real rate of at least 2.8 percent from
super-safe long-term U.S. Treasury bonds.
-
Social Security also pays a very low
rate of return for two-income Hispanic households with
children. A Hispanic, double-income couple that has two
children, that was born in 1965, and that earns the average wages
received by Hispanic Americans1 can expect a rate of return of
2.17 percent from Social Security during its lifetime. This rate
contrasts with a return of 3.17 percent over the same period on an
ultra-conservative portfolio composed of 100 percent U.S. Treasury
bonds, or a return of 4.67 percent on a prudent portfolio made up
of 50 percent broad market equities and 50 percent U.S. Treasury
bonds. In terms of 1997 dollars, this couple could expect to
receive $347,000 more in lifetime after-tax income from a portfolio
composed equally of government bonds and broad market equities than
it could from Social Security.
-
The rate of return has a damaging impact
on communities. The cumulative effects of Social Security's low
rates of return can be appreciated by considering a hypothetical
community. Suppose there existed a city composed entirely of 50,000
young, married, double-earner Hispanic couples in their 30s in
which each person earned the average wage for Hispanics and each
couple had two children. The cumulative amount such a community
could save in a private pension plan by retirement with the same
dollars they currently pay in Social Security taxes is more than
$12.8 billion greater in 1997 dollars than what these couples will
get in Social Security benefits. This amount is roughly equal to
half that the federal government currently spends on food stamps
each year for the whole country and half as much as direct federal
spending on education.2
How a Small Difference in
Returns
Means Big Differences in Cash
The power of compound interest over a career can translate even
small differences in the rate of return into large swings in
lifetime savings.
Consider, for example, a young Hispanic male born in 1975. If in
1998 he were to invest $1,000 at the real rate of return he can
expect to receive from Social Security (1.44 percent), this amount
would have grown a mere $876?a total of $1,876?by the time he
reached age 67. By contrast, if he received a rate of 4.25 percent
(a conservative estimate of the return to a mixed bond-equity
portfolio), his investment would increase more than sixfold?to
$6,242. Using the same logic, what appear to be small differences
in the rate of return results in large differences in net
wealth.
Consider the case of a two-earner average Hispanic family, in
which each spouse was born in 1965:
- Such a family can expect to receive a real rate of return of
2.17 percent from Social Security.
- Investing the couple?s Social Security taxes instead in U.S.
Treasury Bonds would yield a rate of 3.17 percent during the
working lives of the couple. This difference of one percentage
point translates into a $106,000 lifetime benefit over Social
Security.
- Investing in the mixed bond-equity portfolio would yield a real
rate of return of 4.67 percent for the couple. This difference of
2.5 percentage points in the real rate of return would result in a
level of after-tax retirement income approximately $346,700 greater
than Social Security benefits could provide.
Social Security's rate of return for retirement is
crucially important to anyone interested in making plans for an
adequate income in old age. If the rate nearly equals what one
could achieve from stocks and bonds, then it may make sense to
devote current savings to other things beside retirement. But
retirement rates of return from Social Security that are
significantly poorer than returns from bonds or stocks, even after
adjusting for inflation and risk, mean that more current savings
need to be allocated to future retirement needs.
The
ability of individuals to make this important decision depends on
seeing clearly their retirement rate of return from Social
Security. The Heritage Foundation's estimates of the rate of return
facilitate this clarity by referring only to that portion of Social
Security that provides retirement income. We remove the
non-retirement components of Social Security by subtracting
pre-retirement survivors benefits and the taxes that support this
separate insurance program from the retirement rate of return
calculations. Similarly, Heritage does not included disability
insurance taxes or benefits in its retirement rate of return
estimates. Heritage assumes that both the survivors and disability
programs will continue unaffected by the privatization of the
retirement portion of payroll taxes. The Appendix explains the
methodology of Heritage analysts more completely.
The
defenders of Social Security argue that rates of return are
irrelevant to the Old-Age and Survivors Insurance (OASI) portions
of the program. Social Security, they suggest, was intended to
provide a basic, but decent, retirement income to beneficiaries and
stopgap incomes for surviving spouses. Future Social Security
beneficiaries, they argue, should be saving now for additional
retirement income to supplement benefits from the OASI. Thus, they
contend, comparing rates of return on private pension investments
with those from a public program intended to pay out during
retirement at least 35 percent of the wages an average worker
earned prior to retirement is like comparing apples to
oranges.3
This
line of reasoning contains a fundamental flaw. If Social Security
taxes were low enough to allow workers to save these additional
dollars for their retirement, then it is conceivable that
apologists for the system might be correct in characterizing Social
Security as a pension program of last resort. But Social Security
taxes are not low, and they are crowding out the ability of most
low- and middle-income Americans to save for retirement. Thus, the
rate of return on these taxes is very important, especially for
those Americans for whom Social Security is their main retirement
savings.
Crowding Out
Savings
As
payroll taxes have risen, many more Americans have fewer dollars
left over for supplemental retirement investment. Over the past 25
years, Congress and the President have increased Old-Age and
Survivors benefits so often and so much that today the high payroll
taxes needed to pay those current benefits crowd out private
retirement investments.4 In
1972, the average worker (with his or her employer) paid 8.1
percent in Old-Age and Survivors payroll taxes on the first $9,000
of wages and salary (equivalent to about $21,500 in 1997
dollars);5 in 1997, that
worker paid 10.7 percent on the first $65,400 of "earned" income
(or the first $27,340 in 1972 dollars).6 Moreover, between 2020 and 2046,
the Old-Age and Survivors tax rate would have to rise to 14.4
percent from today's 10.7 percent if benefit costs are not
cut.7
Because of rising payroll taxes for
retirement, increasing numbers of poor and middle-income workers do
not have the after-tax funds needed to create private supplemental
pension investments.8 In
fact, Social Security taxes now consume as much of the average
family's budget as do outlays for housing and nearly three times
more than annual health care expenses.9
Key Assumptions and
Methodology
(for details, see Appendix)
- "Rate of Return" is a statistic commonly used to measure the
income performance of an investment. It represents the annual rate
of increase in the value of an investment and usually is expressed
in percentage terms.
- All calculations are adjusted for inflation.
- Both the employee?s and employer?s share of payroll taxes are
included in the calculations.
- Unless otherwise noted, after-tax Social Security benefits and
private investment returns are used for comparisons. That is,
applicable federal income taxes have been subtracted from Social
Security retirement benefits (in the few cases in which those
benefits are taxable) and from the retirement incomes derived from
private retirement savings.
- In order to focus just on the individual retirement issues
surrounding Social Security, the estimated insurance cost of
pre-retirement survivors benefits is subtracted from OASI
payroll taxes. Thus, only retirement income taxes and benefits are
compared. Likewise, Heritage?s Social Security model assumes no
change in disability insurance under any of the alternative
scenarios described in this paper. Holding "constant" disability
insurance payments means that the rates of return in this paper
reflect just the retirement portion of Social Security?s many
programs. Heritage?s Social Security model, too, holds constant the
pre-retirement survivors benefits and taxes that support this
program.
- Future increases in life expectancy and wages are taken into
account and, unless otherwise stated, are consistent with the
intermediate assumptions of the Board of Trustees of the OASI trust
fund.
- Unless otherwise indicated, the "private" investment
alternatives described in this study are based on tax-deferred
accounts similar to individual retirement accounts (IRAs), but with
initial contributions that are not tax-deductible.
The declining rates of return and mounting tax
burdens implied by the current system disproportionately affect the
comparatively youthful Hispanic population. Social Security tax
rates would have to increase by about 40 percent between now and
2050 just to keep the system solvent for all Americans. The U.S.
Bureau of the Census estimates that Hispanics in 2050 will comprise
almost 25 percent of those in the economically active 18- to
66-year-old population (compared with 11 percent in 1997) but only
17 percent of those aged 67 and over. These percentages mean
Hispanic workers will bear a proportionately larger share of the
Social Security tax burden than they do today.10
Because of the long-term financial problems
of the Social Security trust fund, today's calculations of the rate
of return for Social Security are likely to prove optimistic for
future generations. The fact is that Social Security will not be
able to pay out old-age benefits to the "Baby Boom" generation
without additional tax increases on workers or cuts in benefits.
These tax increases or benefit cuts will reduce the Social Security
rates of return further for those workers currently in their
20s--members of the so-called Generation X--and their children. As
Social Security's rates of return fall, the relevance of rates of
return on private pensions rises. That is, members of Generation X
simply will not ignore the decaying prospects for adequate income
during their retirement years; instead, they will insist
increasingly on greater opportunities for creating pensions to
supplement Social Security's Old-Age benefits. Thus, comparing
rates of return for private and public pensions will become even
more important to each subsequent generation.
In
addition, the rate of return is important because the crowding-out
effects of high Social Security taxes on private savings for low-
and middle-income workers affect the wealth that can be left to the
next generation. Few aspects of Social Security are as unintended
or as damaging to low- and middle-income workers as the squeeze
that high payroll taxes put on the formation of intergenerational
transfers of wealth. The inability of poor workers to accumulate
enough savings to leave a nest egg to their children can mean that
their children will be as dependent as their parents could be on
their monthly Social Security check. It means that poor communities
will not have as much "home-grown" capital with which to create new
jobs and sources of income. Without these new jobs and income,
members of the next generation will be less able to save for
retirement than they could be. Thus, by taxing away one
generation's opportunity to help the next generation start earning
at a higher level, the Social Security system acts as a drag on
future generations.
Cumulative Effect
on Communities
Although a low rate of return on rising
Social Security taxes reduces the potential retirement savings of
individual households, it is important to appreciate its cumulative
effect on communities. In both rich and poor communities, less
money accumulated in each household for retirement years means less
money in the community not just for living expenses but also for
new businesses, for sending children to college, and generally for
giving the next generation a more secure financial foundation. In
short, each succeeding generation in a community is weakened
financially by a poor rate of return from Social Security.
For a
very rough picture of the cumulative impact on a community,
consider a hypothetical small community of 200,000 Hispanic
residents. In this imaginary community, there are 50,000 families
of four; all the parents are 30 years old; and both parents work,
earning the average income of Hispanics ($17,911 in 1996). Assume
that no one migrates into or out of this community. In this greatly
simplified hypothetical community, the difference between the
lifetime amount of savings the parents would accumulate by placing
their Social Security tax dollars in conservative portfolios by
retirement and the amount actually obtained from Social Security
would be approximately $12.8 billion in 1997 dollars (based on
family cases analyzed later in this study).11 This is the savings they must
forego because of the failing Social Security tax system and, in
effect, is money drained from their community during their working
years.
To be
sure, this example is completely fictitious and actual calculations
for real communities would vary widely. But this example serves to
illustrate that the deficiencies of Social Security for individual
households imply a significant impact on the long-run financial
health of communities across the United States.
Social Security's
Rates of Return for Hispanic Families
The
Heritage Foundation has calculated Social Security's
inflation-adjusted (or "real") rates of return for various segments
of the Hispanic population and compared these returns with the
rates of return workers could receive if they were allowed to
invest their Social Security taxes in safe, private retirement
investments.12 These
calculations show that Hispanic families of many types receive
relatively low returns for the lifetime taxes they pay.
Defenders of Social Security often argue
that Old-Age and Survivors benefits help low-income workers
especially. But do they? Does Social Security give many Hispanic
Americans a decent retirement return on all of the taxes they pay
into the system over their lifetime of work?13
As Chart 1 indicates, a Hispanic
family earning the average wages received by Hispanic Americans is
likely to receive at best a mediocre and at worst a very poor real
rate of return from Social Security, despite the fact that Social
Security's formulae are designed expressly to redistribute income
toward retirees with average- and low-income work histories.
Single-earner average-income couples born before 1935, who have
paid much lower lifetime payroll taxes, fare better than do much
younger workers. Even the best-case rate of return (4.9 percent for
a single-earner couple with children in which the worker was born
in 1932), however, lies below 7 percent, a conservative estimate of
what economists consider the long-range real rate of return on
equities to be.14 Every
other average-income group lies below this rate of return, or well
below the rates of return available to Americans who have
opportunities to invest in stocks and bonds for the long term.
Double-earner, average-income families, as
well as single, average-income males and females, fare poorly under
Social Security. Average-income, single Hispanic males are hit
particularly hard because of the lower male life expectancy and the
absence of spousal and survivors benefits. The expected real rate
of return from Social Security for average-income males falls from
a high of 3.4 percent for those born in 1935 to 1.4 percent for
those born in 1975--well below what could be realized from a
prudent private investment portfolio.
Table
1 shows Social Security's rates for return for selected birth
years.
What Do These
Rates of Return Mean in Dollar Terms?
Because of the power of compound interest,
even what appears to be a relatively small difference in the real
rate of return can have significant implications for a Hispanic
family's lifetime accumulated wealth. In order to analyze the
dollar implications of Social Security's lower rate of return, the
authors calculated the inflation-adjusted differences between
Social Security's benefits and what a fairly conservative investor
could accumulate by retirement from a portfolio split equally
between long-term U.S. Treasury bonds and broad market equity
funds.
An
average-income, two-earner couple (both aged 32 years in 1997) with
two children can expect to receive about $420,400 in Social
Security benefits in return for a lifetime of payroll taxes. By
investing these same tax dollars in a portfolio made up of 50
percent U.S. Treasury bonds and 50 percent blue-chip equities,
however, this couple could command an estimated $767,100 of
after-tax retirement income in 1997 dollars.15 Even an investment portfolio
composed entirely of intermediate and long-term U.S. Treasury bonds
outperforms Social Security: By the time of retirement, this couple
would generate a lifetime retirement post-tax income of
$526,400.
Hence,
staying in the Social Security program means that average-income,
married Hispanic couples in this age group will bear costs between
$106,000 and $346,700 in retirement savings they could have enjoyed
if current law had given them the ability to invest their payroll
taxes in super-safe U.S. Treasury bonds or in a prudent mix of
Treasury bonds and high-grade equities. These dollar differences,
depicted in Chart 2, translate into significant differences in
rates of return. Social Security "produces" a 2.17 percent
inflation-adjusted rate of return for this couple. If the couple
invested its payroll taxes entirely in Treasury bonds, however,
they would receive a return rate of 3.17 percent while an even mix
of bonds and equities would produce an annualized return of 4.67
percent.
This
couple's gains under the mixed portfolio option in Chart 2 are such that this
average-income Hispanic couple could take its retirement savings
and convert this amount into an annuity upon retirement that paid
exactly the same as Social Security promises to pay--and still have
approximately $205,000 left in their accumulated savings at age 67
to bequeath the children.16
This amount could be used to start a business, pay for education or
health care, or, indeed, to seed the retirement security of the
next generation.
Conclusion
When
the Social Security system began, its aim was to help ordinary
Americans and those in disadvantaged positions to have adequate
financial security in their retirement years. As this analysis and
other Heritage studies have shown,17 however, the current Social
Security system actually may decrease the lifetime well-being of
many socioeconomic groups, even under the most favorable
assumptions. Among the groups that will lose out under the current
system are Hispanics, single mothers, low-income single males,
average-income-married couples with children, and even affluent
professionals. Indeed, many ordinary Americans already understand
that the Social Security system is a bad deal. Recent surveys have
shown that many workers anticipate paying more, in real terms, into
the system than they ever expect to receive in retirement
benefits.18
This
analysis of the Social Security system almost certainly
underestimates its total economic costs for Hispanic Americans. It
makes no attempt, for example, to include the benefits from faster
economic growth, higher wages, and increased employment generated
by a retirement program in which individuals are allowed to invest
their Social Security tax dollars and build the wealth necessary to
sustain them in their old age.
Although the debate on Social Security
reform at times may focus on technical terms (such as the
"replacement ratio" and the trust fund's "long-range actuarial
balance") that mean little or nothing to ordinary American
families, there is little doubt that the outcome of the debate will
be profoundly important to them. For example, regardless of whether
the current system will continue to exist--perhaps sustained by
cuts in benefits and tax increases in taxes--is a matter of great
concern to the 22-year-old Hispanic described earlier or to the
30-something Hispanic couple struggling to accumulate enough wealth
to give itself and its family a better life.
For
almost every type of worker and family, retirement under Social
Security means receiving fewer dollars in old age and passing on
less wealth to the next generation than that individual could if he
were allowed to place his current Social Security tax dollars in
private retirement investments.
William W. Beach is John
M. Olin Senior Fellow in Economics at The Heritage Foundation and
Director of Heritage's Center for Data Analysis.
Gareth G. Davis is a
former Research Assistant at The Heritage Foundation.
APPENDIX:
BASIC ASSUMPTIONS AND
METHODOLOGY
The
authors of this study utilized The Heritage Foundation's Social
Security Rate of Return Microsimulation Model to compare the
benefits different types of families can expect to receive from the
OASI with the Social Security taxes they pay during their working
lives.
The
Heritage model treats taxes paid over a worker's lifetime as a
series of investments. Social Security's rate of return is the rate
of return on payroll taxes that would buy an annuity equal in value
to the Social Security benefits payments. This yield is the
difference between Old-Age and Survivors benefits payments (after
subtracting any applicable income taxes) and the amounts paid to
the OASI trust fund through payroll taxes. Throughout the model and
this paper, all amounts are adjusted for inflation and expressed in
terms of 1997 purchasing power.19
The
Heritage Foundation model includes both portions of OASI taxes: The
share paid by employers and the share paid directly by the
employee. In calculating the return, however, an amount is removed
from taxes paid that is equal to the premium on a term life
insurance policy that has the same value as benefits that are paid
to children of workers (and the spouse caring for their children)
who die before retirement. This means the calculations are not
unfair in including the cost of the spousal benefit when figuring
the rate of return in terms of retirement income. Heritage analysts
also assume that, from 2015, tax rates will increase by the amount
that the Board of Trustees of the Social Security Administration
consider necessary to finance the OASI benefits contained in
current law.
The
earnings to which OASI tax rates are applied are based on a
proportion of the Social Security Administration's average wage
index. Average-income Hispanic workers are assumed to earn 69.63
percent of the average wage index. Past values of this wage are
taken from historical data contained in the Board of Trustees' 1997
annual report, and future wage growth is based on the Trustees'
best guess of what the rate of increase in the average wage will
be. All workers are assumed to begin work on their 21st birthday
and to continue to work right up to the age at which they become
entitled to Social Security's full Old-Age and Survivors benefit.
For those retiring in 1997, this is age 65; but under current law,
this retirement age is scheduled to increase gradually until
reaching 67 for those born in 1960 and later.
The
model calculates post-retirement Old-Age and Survivors benefits to
individuals according to formulae stipulated in current law and the
"best-guess" economic assumptions contained in the 1997 Annual
Report of the Board of Trustees, up to the date on which their life
expectancy expires. Neither Disability Insurance taxes nor benefits
are included in the model.
The
model uses life expectancies drawn from the National Center for
Health Statistics' 1992 Life Tables for the United States.20 Heritage analysts adjusted these
life tables for future changes in life expectancy, using the
mid-range projections of the 1997 Trustees Report.
Throughout this study, comparisons are made
between what families could accumulate during their working lives
if they were able to invest their Social Security Old-Age and
Survivors taxes (less the life insurance premium equal to the value
of pre-retirement OASI benefits) and what they can expect to
receive, on average, in Old-Age and Survivors benefits. Different
assumptions are entertained regarding the composition of the
worker's portfolio of private investments. For years prior to 1997,
the historical inflation-adjusted rates of return on long-term U.S.
Treasury bonds21 and U.S.
equities22 are used to
determine, respectively, the rate of return on bonds and the rate
of return on equities. For the period 1997 onward, Heritage
analysts use forecasts of the real rates of return on 30-year
long-term U.S. Treasury bonds to estimate returns on bond
investments. These forecasts were made by WEFA, Inc., an economics
consulting firm, and published in its Long-Term Macroeconomic
Forecast for October 1997.23
The eventual long-run average of these forecasts is a 2.8 percent
real rate of return. The annualized real rate of return on equities
is assumed to be 5.7 percent, which lies at the lower boundary of
professional estimates of the long-run returns to equities.24
The Heritage
Foundation
Social Security Rate of Return Microsimulation Model
The
Heritage Foundation Social Security Rate of Return Microsimulation
Model computes the explicit annualized rate of return from Social
Security on the basis of the taxes that individuals or couples are
projected to pay and the benefits they can expect to receive during
their lifetime. The focus of the model is not to provide estimates
of the "average" rates of return to existing populations but rather
to use data to construct representative individual and family types
and to estimate the rates of return that those representative types
can expect to receive.
Internal Rate of
Return
The
internal rate of return is defined as the rate that will set the
expected discounted value of the stream of Social Security OASI tax
payments (that is, taxes [Ti]) equal to the expected
discounted stream of income from the system (that is, benefits
[Bi]).
Discount Rate
r is the discount rate such that
Social Security
Contributions
The
taxes paid by an individual are calculated by multiplying the
individual's taxable earnings and self-employment income in a given
year by the OASI tax rate in that year. Each individual is assumed
to begin work on his 21st birthday and to cease working on the date
on which he is entitled by law to collect the full Social Security
Old-Age benefit. The OASI tax rate is taken from current law until
the year 2015, after which tax rates are adjusted annually so that
income and expenditures of the OASI program are equal.25
The
tax revenue in a given year is calculated by means of multiplying
the earnings for that person by the OASI tax rate
Ti = xi*Wi -
Li
in
which x is the OASI tax rate (combined employee and employer
share) for year i, Wi is the total taxable wage,
salary, and self-employment income for year i; and Li
is an amount equivalent to the value of a life insurance premium
equal to the actuarial value of pre-retirement OASI coverage.
Earnings
The
individual's annual earnings are assumed to be a fixed proportion
of Social Security's average wage index26 for employed and self-employed
workers. Average-income Hispanic workers are defined as those
earning $17,911 in wages and salaries.27
For
periods subsequent to 1996, the average wage index is assumed to
grow at the rate assumed under the "intermediate" projections made
by the Social Security Board of Trustees in its 1997 Annual
Report.28 In the case of the
"Single-Earner Married Couple" scenario, it is assumed that one
spouse pays no OASI taxes during his or her lifetime. In the case
of the "Double-Earner Married" couple scenario, each earner is
assumed to pay OASI taxes.
Post-Retirement Old-Age and
Survivors Benefits
OASI
benefits are calculated on the basis of the "bend point"
formulae--the earnings levels from which benefit amounts are
calculated--as specified under current law. For example, in order
to calculate the monthly benefit amount for an individual who first
becomes eligible for full Social Security Old-Age benefits in 1995,
the individual's Average Indexed Monthly Earnings (AIME) is
calculated according to the formulae contained in current law.
Individuals receiving benefits for the first time in 1997 are paid
90 percent of their AIME up to the $437 bend point, 32 percent of
any earnings between the $437 and $2,635 bend points, and 15
percent of any amount in excess of $2,635 (up to the maximum amount
of earnings that are taxable). For years after 1997, these bend
points are indexed at rates in the "intermediate" range projections
made in the 1997 Trustees' Report.
Benefits are paid up to the point of the
individual's life expectancy. These tables are adjusted to
incorporate fully the effect of changes in life expectancy that are
estimated by the Trustees of the Social Security Trust Funds to
occur over the period 1993-2070.
Survivors Insurance
For
married couples, the value of pre-retirement Survivors
Insurance--paid to children of deceased covered workers and the
spouse taking care of them--is approximated by subtracting from
taxes (Ti) the premium required to buy an equivalent term
life insurance policy. Covered individuals are assumed to carry two
10-year term life insurance policies over 20 years between the ages
of 35 and 55. For each covered worker who turned 35 in 1997 and who
has two children and earns an average wage, the Survivors Insurance
policy is estimated to be equivalent to a 10-year term life
insurance policy worth $295,000. For each average-wage covered
worker with two children who turned 45 in 1997, the Survivors
Insurance policy is assumed to be equivalent to a 10-year term life
insurance policy worth $194,700. The market insurance annual
premiums required to buy every $250,000 worth of insurance (in
1997) are estimated, respectively, to be $167 and $345 for a male
and $150 and $230 for a female.29 The estimates of the life
insurance component are indexed to changes in the earner's Primary
Insurance Amount,30 which is
used to calculate the worker's retirement benefit.
In the
case of the single-earner married couple, each spouse is assumed to
be the same age. After retirement, the couple is paid 150 percent
of the benefit amount payable to a single beneficiary during the
lifetime of the husband. During the period between the death of the
husband and the death of the wife, the wife is paid 100 percent of
the benefit amount payable to a single recipient.31
Life Expectancy
Life
expectancy by worker's age in 1992 is estimated based on data
contained in the National Center for Health Statistics' 1992 Life
Tables.32 These estimates
reflect only the demographic conditions that prevailed in 1992,
however, but not the long-term secular upward trend in life
expectancy that improved health care and better nutritional
standards will cause.
The
Board of Trustees of the Social Security Trust Fund, for example,
estimates that life expectancy at birth will increase by 5.8 years
for males and 4.6 years for females between 1997 and 2070, and that
life expectancy at age 65 will increase by 3 years for females and
2.9 years for males.33 In
order to create life expectancy projections that embody these
projected trends, it is necessary to adjust the 1992 Life Tables.
Three adjustments were made to the 1992 Life Tables so they would
conform with life expectancy estimates for Hispanics contained in
the U.S. Census Bureau's population projections.34
First,
Heritage analysts made a slight adjustment in the 1992 Life Tables
by applying to them an age-weighted index that adjusts for the
estimated increase in life expectancy over 1992-1997:
Q = E + J, and
J = ((O/65)*S
+((65-O)/65)*X)
in
which
Q = 1997 "adjusted" static life
expectancy;
J = age-weighted increase in life
expectancy age over 1992-1997;
E = life expectancy based on 1992
"static life tables";
O = age in 1992 (ranges from 16 to
60); and
S and X = respectively, the
increase in life expectancy at birth and age 65 over 1992-1997.
Second, Heritage analysts recognized that
the gains in life expectancy in the post-1997 period will not be
uniform across the age distribution. The Social Security
Administration estimates that life expectancy at birth will
increase much faster than life expectancy at age 65. In order to
calculate the gain in life expectancy for individuals between these
two points (birth and 65), an age-weighted index is used:
G = ((A/73)*B
+((65-A)/73)*x')
in
which
G = overall gain in life expectancy
for a particular age group over 1992-2070;
A = age in 1997 (ranges in model
from 21 to 65);
B = gain in life expectancy at birth
between 1997 and 2070; and
x' = gain in life expectancy at age
65 between 1997 and 2070.
G can be used to construct a
projected life table for the single year 2070, at which point
L is life expectancy for each age group in 1997 and G
is the gain in life expectancy expected to occur for that
particular age between 1997 and 2070:
L = Q + G.
Third,
this projection also must take into account the fact that life
expectancy gains will be distributed over time as well as across
the age distribution. The gains in life expectancy projected to
occur will be spread across a period between now and 2070. The
later a cohort is born, the greater the proportion this increased
longevity will be from the point at which the cohorts can be
assumed to benefit. In order to estimate the degree to which a
given cohort will benefit from this increase in life expectancy,
the following linear weighting equations were used:
"Dynamic" Life Expectancy = Y +
R*(G)
in
which
Y = Q, or life expectancy in
1997;
R = ((2070-V)/73); and
V = year in which the individual's
life expectancy expires.
Endnotes