GRAPH: Social Security decreases inequality

Perhaps even more surprising, federal transfer payments have done much more to increase income inequality than federal taxes. That’s because, in Ryan’s words, “the distribution of government transfers has moved away from households in the lower part of the income scale”… In effect, Social Security and Medicare have been transferring money from low-earning young people (who don’t pay income but are hit by the payroll tax) to increasingly affluent old people.

That’s from this Michael Barone piece summarizing Rep. Paul Ryan’s response to CBO’s now-famous inequality report.

Barone’s piece was confusing, because one could easily walk away with the conclusion that Ryan (or Barone misinterpreting Ryan’s argument) believes that federal taxes and transfers are actively raising inequality. But that’s not what CBO found. Rather, they found that the tax code and federal transfers have been lowering inequality at a decreasing rate since 1979:

Now it’s true that some features of the federal tax code, such as tax expenditures, are regressive. Social Security, however, is interesting in that it’s a progressive transfer funded by a regressive dedicated source (payroll taxes). That made me wonder whether Social Security was a net “equalizer.”

Luckily, the Current Population Survey has a few recent years of household income and tax data that allow answering this very question. These numbers aren’t completely apples-to-apples with CBO’s (mine, for example, take out state income taxes as well), but they give a decent first approximation of how Social Security has affected inequality since 2004. The bottom line is that Social Security has been a significant equalizer, lowering income inequality as measured by the Gini index by between 7 – 8% in the 2004 – 2008 period:

This doesn’t answer the question of Social Security’s relative effect on inequality over a longer period (say, since 1979… sorry, the public data don’t go back that far), but it does show that in an absolute sense, Social Security significantly reduces household income inequality.