Education and Social Security

Article excerpt

Social Security and reforming Social Security has become a hot issue topic on Capitol Hill and in virtually every coffee shop across the country.

Since its inception, Social Security has been a popular program because most retirees have received reasonable rates of return on the payroll taxes they have paid. However, as the program matures and as future workers face the daunting task of paying for the retirement of the baby boom generation, taxes will rise and the investment value of Social Security will decline.

A recent white paper by Liqun Liu and Andrew J. Rettenmaier considers Social Security as an investment for different classes of workers based on their level of education. Why education, rather than income? Everyone's income will vary a lot over the course of a 40- to 45-year work life. As a result, level of education is a better predictor of expected Social Security taxes and benefits than current wages according to Liu and Rettenmaier.

Education affects a person's investment in Social Security in other ways. Someone who drops out of high school will pay payroll taxes for more years than someone who remains in school. Yet because of Social Security's peculiar rules, these extra years of payments do not add anything to retirement benefits. In this sense, Social Security penalizes those with less education. On the other hand, more education tends to produce higher income over an entire work life and higher-income workers are treated less generously under Social Security's benefit formula.

How any particular individual is affected also depends on such factors as life expectancy, marital status, number of children and the life expectancy of a spouse.

Now before you start crossing your eyes on this issue because it bores you and you are just not interested in the issue, Liu and Rettenmaier have made calculations for individuals born in different years with different levels of educational achievement. In each case, they have calculated the internal rate of return on payroll taxes paid and the net present value of Social Security: the value today of expected future benefits minus expected costs.

Among workers born in the same year, they found that in most cases those with less education receive a higher rate of return than those with more education. Using a conservative, inflation-adjusted discount rate of 4 percent, they found that the present values are negative in most cases regardless of age or education; but workers with less education have lower lifetime losses than those with more education.

Present values

for single men

For singles, their calculation assumes the worker's tax payments produce his own retirement benefits exclusively -- with no spousal benefits, no surviving spouse benefits and no benefits to surviving children. They find that:

* Regardless of the level of education and year of birth, single men would have done better if they could have invested their payroll tax dollars in the private capital market. However, those with more education do worse than those with less.

* For example, a 20-year-old high school graduate can expect to pay $32,667 more in taxes than he receives in benefits.

* A 20-year-old college graduate can expect a lifetime loss of $63,363.

* A 20-year-old who stays in school and earns a graduate degree can expect a net loss of $93,170.

* Social Security imposes not only a lifetime tax on workers, but also a loss that, while small or nonexistent during the program's early years, has grown through time. …