Social Security Benefits Now Favor Higher Paid Workers

The U.S. Social Security system, which was designed to redistribute income from highly paid workers to workers who earned lower lifetime income, is subtly changing as the average retirement age in the United States rises. The basic formula was highly progressive and returned to lower earners a higher percentage of their income through Social Security benefits than was paid in benefits to more highly paid workers.

That formula is changing, according to new research from the Brookings Institution that indicates that the gap between lower and higher paid workers is growing wider and favoring workers who earn the highest incomes.

The data suggest several reasons for this. Most important, perhaps, more educated workers earn more and have an incentive to work longer. The increase in the age at which workers can claim full benefits from 65 to 66 is another incentive to working longer as is the change from defined-benefit retirement plans to defined-contribution retirement plans, which allows workers to keep accumulating savings no matter how long they work.

Lower paid workers, however, retire earlier. According to the Brookings study:

Fifty-six percent of men and women in the bottom third of the mid-career income distribution—and with a full-retirement age of 66—begin claiming Social Security at or before age 62. Only 13.8 percent delay claiming a pension until they’re 66 years old.

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The study notes that delaying benefits claims until the age of 70 increases the monthly benefit by at least 76%.

There is another reason for the widening gap between high- and low-paid workers’ Social Security benefits. Higher paid workers live longer. The Brookings study notes that for men born in 1940, more highly paid workers have a life expectancy that is 12 years longer than lower paid workers.

The full paper and related findings are available at the Brookings Institution.