The Social Security secret that gives the rich more benefits

Social Security provides retirement benefits to tens of millions of Americans, but the program also has a progressive nature to its monthly payouts. By giving low-income workers a higher percentage of their former salaries than high-income workers receive, Social Security provides more support to those who need it more, and many policymakers see that as a positive aspect of the program. Yet recently, researchers discovered a secret that has led richer Americans to get more from Social Security despite its progressive traits. As lawmakers consider changes to Social Security, they should look at how the program modifications could address one issue more clearly: how disparities in life expectancy between richer and poorer Americans affect Social Security benefits.

A study last year from the Brookings Institution took a closer look at Social Security and life expectancy among its beneficiaries. What it found disturbed some policymakers: that richer Americans have seen their life expectancies rise to a greater extent than poorer Americans, and that has shifted some of the financial benefits of Social Security away from the poor toward the rich.

How life expectancy affects Social Security

The most important aspect of Social Security is that it provides benefits for life. No matter how long you live, you can count on your Social Security check being there month in and month out. That's true even after you use up your retirement assets, run out of other savings, and have sold off major assets like your home. The lifetime benefits that Social Security provides aren't impossible to replicate elsewhere, but there aren't many ways to guarantee a benefit that will never run out as long as you live.

One consequence of Social Security's provisions is that the longer you live, the more you receive in benefits. That works out well for individual beneficiaries, and at the larger population level, it shouldn't pose a problem as long as the typical life expectancy for recipients is relatively uniform across the entire population.

The study discovered two different aspects of income inequality that have consequences on total lifetime Social Security benefits. First, those who make more money generally live longer than those who make less money. The study's results showed that among women born in 1940, those in the top 10% of the income distribution live more than 10 years longer than those in the bottom 10% of incomes. Men see an even greater disparity, with the top 10% male having a life expectancy that's 12 years longer than men in the bottom 10%. The net result is that the richest Americans bring in 10 to 12 years more in monthly Social Security checks, building up a lifetime advantage over those with shorter life expectancies.

In addition, the study also found that richer Americans tend to take full advantage of their benefits by deferring them later into retirement, avoiding the reductions that early claimers suffer and sometimes earning delayed retirement credits. When you split Social Security recipients into three groups based on income, the poorest group was a third more likely to take benefits at 62 then the richest group. By contrast, the richest group was more than twice as likely to wait until 66 or later before claiming.

Why life expectancy gaps matter

The primary problem with this is that many policymakers believe that the emphasis on assisting lower-income Americans through Social Security is a key objective of the program, and these trends have the capacity to undo some of the good that Social Security has done in fighting income inequality among older Americans. Such policymakers would like to see any changes to Social Security reflect the shifting income and life expectancy demographics of the program to restore its positive impact on the elderly.

Moreover, as lawmakers look at ways to reform Social Security to return it to long-term financial viability, having a good baseline from which to consider new policies is important. For instance, some lawmakers have proposed means-testing to limit benefits for higher-income Americans. Such provisions could be tailored to offset the current unintended lifetime bonus that wealthier retirees get from Social Security because of their propensity to live longer. Conversely, any benefit cuts to low-income recipients could have a disproportionate harsh impact because of the fact that they are already vulnerable to the life expectancy gap.

Social Security recipients and current workers alike can expect a vigorous debate about Social Security in the months and years to come. The issue is complicated, but by keeping aspects of the program like this one in mind, you can make your own decision about what solution takes every concern into account in the best possible way.

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