Is Social Security fair?
Whether you consider Social Security to be fair or not depends on a number of factors, such as the demographic group you're in throughout your life, your unique life circumstances and whether you take a narrow financial view vs. a broad social perspective.
Social Security is a program of "social insurance," and we can gain insights into how people view it by dissecting each word of its definition. "Insurance" refers to a financial program that pools the participants' exposure to uncertain financial risks. Members who pay into any insurance program do so to protect against the consequences of a life event they can't predict with accuracy.
The classic insurance example is auto or home insurance. Although not many people experience damage or loss to their cars or homes, when they do, it's usually substantial, and they collect an insurance benefit when they incur such a loss. Most people, however, don't receive any direct benefits from auto or home insurance if they don't incur a loss, despite having paid substantial premiums for the coverage.
Living a long time is one financial risk that you can be insured against, although the financial consequences aren't quite as cut and dried as they are with auto or home insurance. Most people don't know how long they'll live and, as a result, how long they'll need retirement income. This is a tricky retirement planning challenge that's tough for many people to fully understand and manage.
In simplest terms, a retirement income insurance program pays people who live a long time more benefits than people who don't live very long -- that's the very nature of insurance.
Commercial insurance programs usually have a direct relationship between the amounts paid into the system, such as premiums, and the benefits expected, based on the actuarial chances of receiving such benefits. Thus, it costs more to insure a new, large, expensive car compared to one that's small, old and less valuable. You'll also pay more for fire insurance if you have a wood shingle roof compared to an asphalt shingle roof, because your risk of loss is higher.
It's the same with retirement income insurance: It costs more to insure a lifetime retirement income for a female compared to a male because a woman is expected to live longer. For the same reason, it costs more to provide retirement income insurance for a 62 year-old than for a 70 year-old.
The "premiums" you pay for Social Security are the FICA taxes that are withheld from your paycheck. The "benefits" you expect to receive are retirement and disability benefits and, if you're married or have children, dependent and survivor's benefits.
When you put the word "social" in front of "insurance," that means social goals go into the pricing of the insurance program. Pricing for the Social Security program takes into account considerations that go beyond pure actuarial principles. For example, a pure actuarial approach would charge higher FICA taxes for women compared to men, but that's socially unacceptable, so men and women are asked to pay the same FICA tax rate.
Our political leaders have incorporated other social goals into Social Security as well. For example, when you consider the expected benefits relative to FICA taxes paid, the program provides relatively more benefits for low-income workers compared to high-income workers. When designing the program, lawmakers took into account the fact that high-income workers usually have more resources to provide for their own retirement security than low-income workers do.
Similarly, the program provides higher expected benefits to married people with families compared to single people without children, because the lawmakers also believe families have higher financial needs.
So far we've addressed the narrow financial considerations regarding Social Security's fairness. Looking more broadly at the issue, high-income people tend to live longer than low-income people, which partially offsets the weighting of benefits for lower-income people. And women tend to receive more benefits than men because they live longer, partially offsetting the lower wages they've earned compared to men.
Many people have difficulty setting aside money to invest for retirement, so Social Security is a form of forced savings. Without these benefits, such people might be living in abject poverty in their retirement years, which most Americans would likely agree is an undesirable outcome for a civilized society.
Poverty among the elderly has fallen dramatically since Social Security was implemented. Before then, it was common for seniors to move in with their children during their final years. Now most seniors are able to live independently from their children, which many people consider to be a positive consequence.
As you can see, a broader perspective makes the "fairness" question more complex. But as a result of both the narrow financial factors and the broad social considerations, Social Security has very wide support within our society. While you work, you pay FICA taxes to support the current generation of retirees, with the expectation that your children will do the same for you. Collectively, we think it's a desirable social goal to care for the most vulnerable of our citizens, which include the very old.
Social Security will continue to evolve to meet the emerging needs of our older citizens and to address the ability of current workers to support the system with the taxes they pay. It should be part of your retirement plan to understand how Social Security works for you and its role in society.
