While Social Security was designed to provide benefits that corresponded to tax contributions, the program has always included some measure of progressivity. The authors propose a new measure for these transfers from high-earners to low-earners. Their progressivity index incorporates techniques from the Gini coefficient, a measure of income inequality, to create a simple metric of progressivity. The authors’ index finds that Social Security provides a level of redistribution halfway between that provided by pure defined contribution and flat benefit systems.

Resident Scholar  Andrew G. Biggs

The Social Security benefit formula has incorporated some measure of progressivity almost since the program's inception. As early as 1939, amendments to the original Social Security Act stipulated that monthly benefits replace a higher proportion of preretirement earnings for people with lower earnings compared with those with higher earnings (Martin and Weaver 2005). Throughout the program's history, benefit adequacy--promoted through a progressive benefit formula--has been balanced with equity, the goal that benefits increase with contributions.

Although the Social Security retirement system is designed to replace a higher percentage of earnings for lower-income workers and their dependents, the degree to which the program actually achieves progressive outcomes is less certain. To contribute to our understanding of this issue, this paper introduces a new measure--a progressivity index--to estimate the progressivity of the Social Security retirement program. Our purpose is to develop a comprehensive, easy-to-understand summary measure for evaluating the magnitude of progressivity under Social Security within cohorts and for assessing potential shifts in systemwide progressivity as a result of policy changes.

Andrew G. Biggs is a resident scholar at AEI.

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