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
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
* 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. …