Redistribution effects of using Social Security retirement revenue to finance social spending

This paper examines social security's effects on income distribution and equality. It analyzes social security both as a retirement program and as an antipoverty program. The objective is to determine if overall income redistribution by the program increases or decreases income equality, or if it leaves equality unchanged. The model used analyzes the program's income transfers over a contributor's lifetime.; Funds that social security collects for a contributor's retirement are partly spent for his own retirement benefits, but also are used as a subsidy to keep other retirees with low lifetime contributions out of poverty. Retirement benefits increase with increasing income, but only at a decreasing rate. Because the program was designed to redistribute income, workers with low lifetime incomes have expected retirement benefits in excess of lifetime contributions, while workers with high lifetime incomes have expected benefits below their lifetime contributions.; The founders of social security intended that, as a contribution based social insurance plan, the program would reduce the number of people who would qualify for needs tested public assistance. In fact its benefits do succeed at keeping low income retirees out of poverty, causing them to qualify for less assistance from other programs (e.g. food stamps, supplemental security income). The first part of the model (method A) identifies how the wealth of each income group changes, by comparing social security taxes paid with expected future retirement benefits. Income groups are measured for individuals by half decile. The second part of the model (method B) compares current social security with an alternative scenario in which social security tax revenue is not used to keep the elderly out of poverty.; At present, 6% of workers earn more than the maximum amount taxable by social security. Because social security is a proportional tax on a portion of labor income, workers who earn more than the maximum amount taxable are paying a lower percentage of their income to the program than workers who earn less than this amount.; By definition this method of taxation is regressive. A greater question, asked in this paper, is if the overall program is regressive after all of the effects of its taxes and transfers on income equality are estimated. Because the program redistributes income one could reasonably expect that it increases income equality. Instead, the model employed by this dissertation found that the program's effects on income equality were negligible.