The majority of women in this study fall into the lowest AIME brackets and have low individual lifetime earnings; however these same women have relatively high lifetime household earnings. The same is not true for men. Men in the lowest AIME brackets also tend to have very low lifetime household earnings.
Redistribution at the level of the Individual and the Household
There is less redistribution among all individuals when individual and spouse benefits are taken into account, suggesting that those with high AIMEs benefit disproportionately from spouse and survivor benefits.
When households are categorized according to lifetime household earnings, and spouse and survivor benefits are accounted for, the extent of redistribution from households with high lifetime earnings to those with low earnings is reduced by half.
Redistribution when Households are Classified by Earning Capacity
When households are grouped according to the potential household income, or earnings during years when both spouses were engaged in substantial work, there is very little redistribution from families with high to low earnings capacity. The remaining redistribution, however, goes primarily to families in the lowest decile and contributes significantly to their benefits.
Most of the redistribution based upon potential household income occurs within AIME groupings. The likely transfer is from families with two earners to families with about the same combined earning power but in which only one spouse is a lifetime worker.
Conclusion
In this cohort of individuals nearing retirement, the current Social Security benefit formula clearly redistributes individual benefits from individual taxes when examined at the level of the individual. Much of the redistribution at the individual level is from men to women. The extent of redistribution is halved, however, when benefits and taxes for both spouses are analyzed at the level of the household. When households are grouped by their potential earnings, there is very little redistribution from high earning to low earning households. The current policy effectively subsidizes households with a spouse who, although working at least ten years to qualify for benefits, remains home for many years rather than working in the market.
It is important to remember that the results presented in this paper pertain only to a single cohort, those born from 1931 to 1941. Further investigation of more recent cohorts is needed to see if these findings are generalizable. Nonetheless, it is clear that the common perception that a great deal of redistribution from the rich to the poor is accomplished by the progressive social security benefit formula is inaccurate.
It is often argued that privatization would undermine the redistribution fostered by the progressive social security benefit formula. Our findings suggest that for the cohort of Americans nearing retirement, there is actually very little redistribution of social security benefits from the rich to the poor. Thus, introduction of a system of privatized accounts that ignores issues of redistribution would have no major effect on the distribution of social security benefits among households with different earnings capacities.
Alan L. Gustman is Loren Berry Professor of Economics at Dartmouth College, Department of Economics, Hanover, N.H. 03755 (alan.l.gustman@dartmouth.edu). Thomas L. Steinmeier is Professor of Economics, Texas Tech University, Department of Economics, Lubbock, Texas 79409 (Thomas.Steinmeier@TTU.edu). We would like to thank Olivia Mitchell, Jon Skinner and David Weir for their helpful comments, and Doug Staiger and Steve Venti for useful discussions. This research was supported by a grant from the Michigan Retirement Research Center. The paper upon which this brief is based has been accepted for publication in the Journal of Public Economics.