Title II of the Social Security Act, as amended, establishes the Old-Age, Survivors, and Disability Insurance program, which is generally known as Social Security. The program provides cash benefits to retired and disabled workers and their dependents and survivors. The Congress designed Social Security benefits, at least implicitly, with a focus on replacing lost wages. Because the program is financed on a modified pay- as-you-go basis, payroll tax contributions of those currently working are transferred to current beneficiaries. Current beneficiaries include insured workers who are entitled to retirement or disability benefits, and their dependents, as well as survivors of deceased insured workers. The progressive benefit structure effectively provides greater insurance protection relative to contributions to earners with lower wages than to high-wage earners. Workers become eligible when they have enough quarters of coverage under Social Security, (i.e., quarters of the year with earnings from which Social Security taxes are deducted); they and their employers pay payroll taxes on those covered earnings to finance benefits. In 2002, 153 million people had earnings covered by Social Security, and 46.4 million people received approximately $454 billion in OASDI benefits. Social Security was originally an old-age retirement program. However, the Social Security Amendments of 1939 added two new categories of benefits: dependent benefits paid to the spouse and minor children of a retired worker, and survivor benefits paid to the family after the death of a covered worker. In calendar year 2002, about 10 million people received approximately $106 billion in survivor and dependent benefits. Further, the amount of Old-Age and Survivors Insurance (OASI) benefits paid in 2002 totaled $388 billion for 39 million recipients. Established in 1956, Social Security Disability Insurance provides monthly payments to eligible workers with disabilities who are under the normal retirement age and to their dependents. To be eligible for DI benefits as an adult, a person must have enough quarters of covered earnings and must be unable to perform any substantial gainful activity by reason of a medically determinable physical or mental impairment that is expected to result in death or that has lasted or can be expected to last for a continuous period of at least 12 months. As with retired worker benefits, disability benefits are funded by payroll taxes paid by covered employees and their employers. In calendar year 2002, about 7.2 million individuals received approximately $65.6 billion in DI benefits. Our previous work on Social Security includes research on the effects of Social Security reform on women, the disability insurance program, the effects of increasing the retirement age, and adequacy issues associated with the program. See our related products section for a listing of our previous work in this area. Further, analysis by other organizations also has examined the experiences of minority groups under Social Security. Incorporating both different earnings and life expectancies of the racial/ethnic groups, some of the research has focused on the relative importance of Social Security for minorities. Others have suggested that blacks benefit less than whites under the current system and that both blacks and Hispanics would experience higher returns under a system that incorporated individual accounts. Following the analysis of Cohen, Steuerle and Carasso, our analysis takes a broader approach to the measurement of Social Security. We analyze data on the overall program, OASDI, as well as the component programs, OASI and DI. A variety of socioeconomic and demographic factors influence the receipt of Social Security—most significantly, lifetime earnings, the incidence of disability, and mortality. Lifetime earnings factor directly into the progressive benefit formula, which replaces a larger proportion of pre- retirement covered earnings for low-income earners than it does for higher-income earners. Additionally, the probability of being on the Disability Insurance rolls affects the expected value of benefits. Finally, mortality determines the number of years an individual will receive benefits and pay taxes and, therefore, the total benefits received. One key factor affecting the level of Social Security benefits is earnings. The calculation of Social Security benefits is designed to replace a larger proportion of the earnings of lower earners than it does for higher earners. Thus, the benefit formula is progressive. For example, workers who retire at the normal retirement age in 2003 with scaled, low lifetime covered earnings will have benefits that replace approximately 56 percent of their earnings. Workers with scaled, medium lifetime earnings will have about 42 percent of their earnings replaced, and workers with lifetime earnings at the maximum taxable level will have approximately 30 percent replaced. The probability of becoming disabled also affects the expected value of Social Security benefits. DI recipients start drawing Social Security earlier and simultaneously see their tax liability reduced; in general, they will receive greater benefits in relation to the taxes they pay. DI benefits are based on the same formula as OASI benefits, so that benefits for low- income workers replace a larger proportion of their earnings. The average age of disabled workers is approximately 50. Disability trends will have a significant effect on future Social Security program costs as the Baby Boom generation ages. The highest rates of disability incidence within the DI program occur from age 50 to 65. Because of changing demographics, the number of DI beneficiaries is expected to more than double over the next 75 years, from the current 7.2 million to more than 16 million. Finally, mortality rates determine the expected number of years a person will contribute taxes and receive benefits and, therefore, the amount of total benefits received. For example, if a nondisabled person dies before retirement, that individual’s benefit-to-tax ratio is expected to be lower than the ratio for an individual who lives to receive retirement benefits. Individuals who die before retirement will no longer make contributions to the Social Security program. However, they may have dependents who would benefit from the survivor portion of the program. Differences by race in the relationship between taxes paid and benefits received under Social Security are due to differences in lifetime earnings, the incidence of disability, and mortality between the groups. In the aggregate, blacks and Hispanics have higher disability rates and lower lifetime earnings, and thus receive greater benefits relative to taxes than whites. However, whites with low lifetime earnings and high disability rates also receive greater benefits relative to taxes than their higher- income and nondisabled counterparts. Because blacks have higher mortality than whites, their ratio of benefits to taxes may be lower in comparison, but this depends, in part, on whether they have survivors. Although blacks die younger than whites, and may receive fewer years of retirement benefits, they may also leave survivors who receive benefits for more years than their white counterparts. In the aggregate, blacks and Hispanics generally have higher disability rates and lower lifetime earnings, and thus receive greater benefits relative to taxes than whites. Figure 1 presents the median lifetime benefit-to-tax ratio for the 1931-40 birth cohort. However, these aggregate differences by race are small, for example, compared to the differences between high and low earners within racial groups. The aggregate results are affected by other factors that vary by race, such as lifetime earnings, disability incidence, and mortality. When examined by earnings quintiles, those in the lowest earnings quintile experience a higher benefit-to-tax ratio relative to those in the upper quintiles. This finding is true across all birth cohorts we examined, which cover people from 1931-64, and the three policy scenarios we examined. Figure 2 presents OASDI’s lifetime median benefit-to-tax ratios experienced by individuals in the 1931-40-birth group for different earnings categories under the payroll-tax increase scenario. Those in the lowest quintile, regardless of race, have a higher benefit-to-tax ratio than those in the upper quintiles because the benefit calculation replaces a higher proportion of their earnings compared with higher earners. Figure 3 shows that approximately 38 percent of Hispanics are in the lowest-earnings quintile, while about 35 percent of blacks and 17 percent of whites are. Moreover, about 9 percent of Hispanics are in the highest- earnings quintile; the corresponding percentages for blacks and whites are 11 percent and 22 percent, respectively. (See fig. 3.) Because minorities are over-represented in the lowest earnings quintile and under-represented in the highest quintile, they sometimes have higher benefit-to-tax ratios than whites. In general, groups who are more likely to be disabled receive greater OASDI benefits relative to taxes paid than those who are not disabled. As shown in figure 4, low-income individuals, particularly blacks, achieve higher benefit-to-tax ratios under OASDI (when the disability program is included) than under OASI. This is because in addition to having lower lifetime earnings than whites, blacks are more likely to be on DI than whites or Hispanics. As shown in figure 5, blacks make up 10.3 percent of the sample, but 16.9 percent of the DI beneficiaries, while Hispanics make up about 8.4 percent of the sample, and 10.1 percent of DI beneficiaries. Whites are the only group to make up a smaller percent of DI beneficiaries than of the whole sample. The relationship between mortality and the ratio of benefits to taxes for an individual is more complicated than it is for lifetime earnings and the incidence of disability. In general, mortality rates affect the expected number of years a person will contribute taxes and receive benefits and, therefore, the amount of total benefits received. For individuals who die before they retire, the benefit-to-tax ratio is expected to be lower than for individuals who live to receive retirement benefits. Mortality rates among different racial groups suggest that blacks are more likely to die before receiving a retirement benefit than their Hispanic or white counterparts. (See fig. 6.) Though blacks make up about 10.3 percent of our sample, over 16 percent of those dying before age 62 are black. Those not dying, or becoming disabled, before receiving a retirement benefit continue to make contributions to the program while in covered employment.