Lifetime Earnings Patterns, the Distribution of Future Social Security Benefits, and the Impact of Pension Reform

Policymakers have long been interested in understanding the adequacy and distribution of Social Security benefits and in predicting the effects of reform on representative workers. This article describes two new methods for estimating the career profile of earnings for representative workers. It then compares the results of those new methods with earnings profiles assumed in traditional distributional analysis of Social Security and shows the implications of the new results for evaluating Social Security reform.

Retooling Social Security for the 21st Century

Because of the imbalance between promised benefits and available taxes, some reform of Social Security is inevitable. At the same time, perceptions of Social Security are changing rapidly as it moves away from a system where all recipients—whether rich or poor—received more in benefits than they paid in taxes, and where those who were richer consistently received larger net transfers than those who were poorer. Reform is most likely to succeed if it returns to basic principles such as progressivity, equity, and efficiency.

Although these principles sometime conflict, they also provide much common ground. For example, if Social Security is meant to meet the greatest needs of the elderly, then increasing the retirement age (which mainly affects the younger and richer elderly) would be preferable to removal of the cost-of-living adjustment (which mainly affects the older and poorer elderly). Efficiency and equity principles, in turn, call attention to some groups—second earners in household, those with few employee tax preferences, those who work many years, and elderly workers—whose net benefits are lower than others who should have less claim to Social Security resources.