Economics of Social Security
In conjunction with larger Social Security solvency plans, many policymakers have proposed introducing benefit increases for older beneficiaries. This brief analyzes the projected effects of two such policy options on beneficiaries aged 85 or older in 2030 using the Modeling Income in the Near Term model. Both options target older beneficiaries' primary insurance amounts for a 5 percent increase, but they differ in how the increase would be calculated. Both proposals would increase monthly benefits for nearly all older beneficiaries, and both would reduce poverty levels among the aged, relative to currently scheduled benefits. However, the options differ in how the benefit increases would be distributed among older beneficiaries across shared lifetime earnings quintiles.
Outcome Variation in the Social Security Disability Insurance Program: The Role of Primary Diagnoses
This article investigates the role that primary impairments play in explaining heterogeneity in disability decisions. Using claimant-level data within a hierarchical framework, the author explores variation in outcomes along three dimensions: state of origin, adjudicative stage, and primary diagnosis. The findings indicate that the impairments account for a substantial portion of claimant-level variation in initial allowances. Furthermore, the author finds that the predictions of an initial and a final allowance are highly correlated when applicants are grouped by impairment. In other words, diagnoses that are more likely to result in an initial allowance also tend to be more likely to receive a final allowance.
How Did the Recession of 2007–2009 Affect the Wealth and Retirement of the Near Retirement Age Population in the Health and Retirement Study?
This article uses household wealth and labor market data from the Health and Retirement Study (HRS) to investigate how the recent "Great Recession" has affected the wealth and retirement of the Early Boomer cohort, those in the population who were just approaching retirement age at the beginning of the recession. The retirement wealth of people aged 53–58 before the onset of the recession in 2006 declined by a relatively modest 2.8 percent by 2010. For members of older cohorts, wealth had increased by about 5 percent over a comparable age span. The wealth holdings of poorer households were least affected by the recession. Relative losses were greatest for those who initially had the highest wealth when the recession began. The retirement behavior of the Early Boomer cohort looks similar, at least to date, to the behavior observed for members of older cohorts at comparable ages.
Factors Affecting Initial Disability Allowance Rates for the Disability Insurance and Supplemental Security Income Programs: The Role of the Demographic and Diagnostic Composition of Applicants and Local Labor Market Conditions
Various factors outside the control of decision makers may affect the rate at which disability applications are allowed or denied during the initial step of eligibility determination in the Social Security Disability Insurance (DI) and Supplemental Security Income (SSI) programs. This article, using individual-level data on applications, focuses on the role of three important factors—the demographic characteristics of applicants, the diagnostic mix of applicants, and the local unemployment rate—in affecting the probability of an initial allowance and state allowance rates. A random sample of initial determination administrative records for the 1993–2008 period is used for the analysis in a fixed-effects multiple regression framework. The empirical results show that the demographic and diagnostic characteristics of applicants and the local unemployment rate substantially affect the initial allowance rate. An increase in the local unemployment rate tends to be associated with a decrease in the initial allowance rate. This negative relationship holds for adult applicants in both the DI and SSI programs and for SSI childhood applicants.
Profile of Social Security Disabled Workers and Dependents Who Have a Connection to Workers' Compensation or Public Disability Benefits
This note provides a comprehensive profile of the characteristics of disability beneficiaries with a connection to workers' compensation or public disability benefits (PDBs). The 8.3 percent of disabled workers who have this connection tend to be economically better off, more frequently middle aged, male, afflicted with a musculoskeletal and connective tissue disorder, and tend to wait longer to apply for social security disability benefits after onset than the general disabled-worker population. In our analysis, we have included a special focus on California, as this state represents a large portion of the PDB workload, and its experience has a substantial effect on the national picture.
Workplace injuries and illnesses are an important cause of disability. States have designed their workers' compensation programs to provide cash and medical-care benefits for those injuries and illnesses, but people who become disabled at work may also be eligible for Social Security Disability Insurance (DI) and related Medicare benefits. This article uses matched state workers' compensation and Social Security data to estimate whether workplace injuries and illnesses increase the probability of receiving DI benefits and whether people who become DI beneficiaries receive benefits at younger ages.
The Growth in Social Security Benefits Among the Retirement-Age Population from Increases in the Cap on Covered Earnings
This article investigates how raising the maximum level of earnings subject to the Social Security payroll tax leads to the "leakage" of portions of the additional revenue into higher benefit payments. Using data from the Health and Retirement Study, the authors simulate the effects of changes in maximum taxable earnings for cohorts approaching retirement age over a 24-year period. They find, roughly, that almost half of the additional tax revenue from having raised the maximum earnings subject to the payroll tax has leaked into higher benefits.
The authors use the Social Security Administration's Modeling Income in the Near Term (version 6) to describe the likely characteristics, work experience, Social Security benefit status, and economic well-being of future divorced women at age 70, by race and ethnicity. Factors associated with higher retirement incomes include having a college degree; having a strong history of labor force attachment; receiving Social Security benefits; and having pensions, retirement accounts, or assets, regardless of race and ethnicity. However, because divorced black and Hispanic women are less likely than divorced white women to have these attributes, income sources, or assets, their projected average retirement incomes are lower than those of divorced white women.
To project the retirement resources and well-being of divorced women, the authors use the Social Security Administration's Modeling Income in the Near Term (version 6). Findings show that Social Security benefits and retirement incomes are projected to increase for divorced women and that their poverty rates are projected to decline, due in large part to women's increasing lifetime earnings. However, not all divorced women will be equally well off; economic well-being in retirement varies by Social Security benefit type.
This article uses the Social Security Administration's Modeling Income in the Near Term (version 6) to examine how changes in married women's labor force participation and earnings will impact the Social Security benefits of current and future beneficiary wives. Over the next 30 years, a larger share of wives will be eligible for Social Security benefits based solely on their own earnings, and wives' average Social Security benefits are expected to increase by 50 percent. Despite rising female lifetime earnings, wives' earnings typically remain below those of their husbands, so many wives who are retired-worker-only beneficiaries while their husbands are alive will receive auxiliary benefits when their husbands die.
Since its inception, Social Security has featured a taxable maximum (or "tax max"). In 1937, payroll taxes applied to the first $3,000 in earnings. In 2011, payroll taxes apply to the first $106,800 in earnings. This policy brief summarizes the changes that have occurred to the tax max and to earnings patterns over this period. From 1937 to 1975, Congress increased the tax max on an ad-hoc basis. Increases were justified by the desire to improve system financing and maintain meaningful benefits for middle and higher earners. Since 1975, the tax max has generally increased at the same rate as average wages each year. Some policymakers propose increasing the tax max beyond wage-indexed levels to help restore financial balance and to reflect growing earnings inequality, as workers earning more than the tax max have experienced higher earnings growth rates than other workers in recent decades.
Longitudinal Statistics on Work Activity and Use of Employment Supports for New Social Security Disability Insurance Beneficiaries
Longitudinal statistics on the employment activities of Social Security Disability Insurance beneficiaries offer a different perspective than the Social Security Administration's published statistics, which are based on annual data, and have important policy implications.
A person's Social Security benefit, or primary insurance amount (PIA), is 90 percent of the lowest portion of lifetime earnings, plus 32 percent of the middle portion of lifetime earnings, plus 15 percent of the highest portion of lifetime earnings. This policy brief analyzes the distributional effects of three options (the three-point, five-point and upper) discussed by the Social Security Advisory Board to reduce the PIA. The first option would reduce the PIA by 3 percentage points; the second would reduce it by 5 percentage points; and the third would reduce the 32 and 15 percentages of the PIA to 21 and 10 percent, respectively. The third option would exempt about one quarter of the lowest earning beneficiaries, while reducing benefits by a median average of 19 percent in 2070. None would eliminate Social Security's long-term fiscal imbalance, although the third option would eliminate more (76 percent) of the deficit than the three-point (18 percent) and five-point (31 percent) options.
Expanding Access to Health Care for Social Security Disability Insurance Beneficiaries: Early Findings from the Accelerated Benefits Demonstration
The Accelerated Benefits (AB) demonstration project provides health benefits to Social Security Disability Insurance beneficiaries who have no health insurance during the 24-month period most beneficiaries are required to wait before Medicare benefits begin. This article describes the project and presents baseline survey results on health insurance coverage among newly entitled beneficiaries and the characteristics of those without coverage. A 6-month follow-up survey provides information on the effects of the AB health benefits package on health care utilization and on reducing unmet medical needs. The article also reports the costs of providing the health benefits package during the 24-month Medicare waiting period.
This article provides an overview of the Retirement Research Consortium (RRC) from the Social Security Administration's perspective, including a brief history of the development of the RRC, a discussion of the aims of the RRC, and some thoughts on its future. The mission of the RRC is to plan and conduct a broad research program to develop Social Security and retirement policy information to assist policymakers, the public, and the media in understanding the issues. The RRC has been a remarkably successful extramural research venture that has advanced the knowledge base on Social Security and retirement issues, trained new scholars to become the next generation of Social Security and retirement policy experts, and provided objective, research-based input to the policymaking process.
This article reviews the research contributions of the Center for Retirement Research at Boston College over its 10-year history and their implications for Social Security and retirement income policy in three major areas: (1) Social Security's long-term financing shortfall, (2) the adequacy of retirement incomes, and (3) labor force participation at older ages as a means to improve retirement income security. The center has received substantial funding support from the Social Security Administration (SSA) in each area and has also successfully leveraged SSA's investment by attracting funding from other sources.
The Office of Retirement and Disability Policy at the Social Security Administration created the Retirement Research Consortium in 1998 to encourage research on topics related to Social Security and the well-being of older Americans, and to foster communication between the academic and policy communities. The Michigan Retirement Research Center (MRRC) has participated in the Consortium since its inception. This article surveys a selection of the MRRC's output over its first 10 years and highlights several themes in the Center's ongoing research.
The Social Security Administration (SSA) receives reports of earnings for the U.S. working population each year from employers and the Internal Revenue Service. The earnings information received is stored at SSA as the Master Earnings File (MEF) and is used to administer Social Security programs and to conduct research on the populations served by those programs. This article documents the history, content, limitations, complexities, and uses of the MEF (and data files derived from the MEF). It is intended for researchers who use earnings data to study work patterns and their implications, and for those interested in understanding the data used to administer the current-law programs.
An Empirical Study of the Effects of Social Security Reforms on Benefit Claiming Behavior and Receipt Using Public-Use Administrative Microdata
In the past few years, the Social Security Old-Age and Survivors Insurance benefit system in the United States has undergone some of the most significant changes since its inception. Using the public-use microdata extract from the Master Beneficiary Record, we are able to uncover a number of interesting trends in benefit claiming behavior and level of benefit receipt, which can help us understand how the changes in the system are shaping the retirement benefit claiming behavior of older Americans.
Using the Social Security Administration's MINT (Modeling Income in the Near Term) model, this paper analyzes the progressivity of the Old-Age, Survivors and Disability Insurance (OASDI) program for current and future retirees. It uses a progressivity index that provides a summary measure of the distribution of taxes and benefits on a lifetime basis. Results indicate that OASDI lies roughly halfway between a flat replacement rate and a flat dollar benefit for current retirees. Projections suggest that progressivity will remain relatively similar for future retirees. In addition, the paper estimates the effects of several policy changes on progressivity for future retirees.
Researchers David Autor and Mark Duggan have hypothesized that the Social Security benefit formula using the average wage index, coupled with a widening distribution of income, has created an implicit rise in replacement rates for low-earner disability beneficiaries. This research attempts to confirm and quantify the replacement rate creep identified by Autor and Duggan using actual earnings histories of disability-insured workers over the period 1979–2004. The research finds that disability replacement rates are rising for many insured workers, although the effect may be somewhat smaller than that suggested by Autor and Duggan.
Since its inception in 1981, Chile's system of mandatory individual retirement accounts has become a model for pension reformers around the world. A March 2008 comprehensive pension reform law made major changes that address some key policy challenges including worker coverage, gender equity, pension adequacy, and administrative fees. The cornerstone of the new law sets up a basic universal pension as a supplement to the individual accounts system.
Replacement rates are common and useful tools used by individuals and policy analysts to plan for retirement and assess the sufficiency of Social Security benefits and overall retirement income. Because the calculation and meaning of replacement rates differs depending on the definition of preretirement earnings, this article examines four alternative measures: final preretirement earnings, constant income payable from the present value of lifetime earnings (PV payment), wage-indexed average of lifetime earnings, and inflation-adjusted average of lifetime earnings (CPI average). The article also calculates replacement rates for Social Security beneficiaries aged 64–66 in 2005.
It is widely known that about three-fourths of the working-age population is insured for Disability Insurance (DI), but the substantial role played by the Supplemental Security Income (SSI) program in providing disability benefit coverage is not well understood. Using data from the 1996 panel of the Survey of Income and Program Participation (SIPP) we find that over one-third (36 percent) of the working-age population is covered by SSI in the event of a severe disability. Three important implications follow: (1) SSI increases the overall coverage of the working-age population; (2) SSI enhances the bundle of cash benefits available to disabled individuals; and (3) interactions with other public programs—most notably the SSI path to Medicaid coverage—also enhance the safety net. Ignoring these implications could lead to inaccurate inferences in analytic studies.
This article presents the distributional effects of changing the Social Security indexing scheme, with an emphasis on the effects upon disabled-worker beneficiaries. Although a class of reform proposals that would slow the rate of growth of initial benefit levels over time—including price indexing and longevity indexing—initially appear to affect all beneficiaries proportionally, there can be different impacts on different groups of beneficiaries. The impacts between and within groups are mitigated by (1) the offsetting effect of changes in Supplemental Security Income benefits at the lower tail of the income distribution, and (2) the dampening effect of other family income at the upper tail of the income distribution. The authors present estimates of the size of these effects.
Using the New Beneficiary Data System, this article examines the reservation wages of a sample of Social Security Disability Insurance (DI) beneficiaries with work capabilities. It analyzes the magnitude of the reservation wages of DI beneficiaries compared to the last wage earned and to benefit amounts. In addition, the article discusses the determinants of reservation wages for DI beneficiaries.
Old-Age, Survivors, and Disability Insurance (OASDI, Social Security) benefits are indexed for inflation to protect beneficiaries from the loss of purchasing power implied by inflation. In the absence of such indexing, the purchasing power of Social Security benefits would be eroded as rising prices raised the cost of living. Recently, the Consumer Price Index used to calculate the Cost-of-Living-Adjustment (COLA) for OASDI benefits has come under increased scrutiny. Some argue that the current index does not accurately reflect the inflation experienced by seniors and that COLAs should be larger. Others argue that the measure of inflation underlying the COLA has technical limitations that cause it to overestimate changes in the cost of living and that COLAs should be smaller. This article discusses some of the issues involved with indexing Social Security benefits for inflation and examines the ramifications of potential changes to COLA calculations.
Benefit Adequacy Among Elderly Social Security Retired-Worker Beneficiaries and the SSI Federal Benefit Rate
The federal benefit rate (FBR) of the Supplemental Security Income program provides an inflation-indexed income guarantee for aged and disabled people with low assets. Some consider the FBR as an attractive measure of Social Security benefit adequacy. Others propose the FBR as an administratively simple, well-targeted minimum Social Security benefit. However, these claims have not been empirically tested. Using microdata from the Survey of Income and Program Participation, this article finds that the FBR is an imprecise measure of benefit adequacy; it incorrectly identifies as economically vulnerable many who are not poor, and disregards some who are poor. The reason for this is that the FBR-level benefit threshold of adequacy considers the Social Security benefit in isolation and ignores the family consumption unit. The FBR would provide an administratively simple but poorly targeted foundation for a minimum Social Security benefit. The empirical estimates quantify the substantial tradeoffs between administrative simplicity and target effectiveness.
New Evidence on Earnings and Benefit Claims Following Changes in the Retirement Earnings Test in 2000
In April 2000, Congress enacted the Senior Citizens Freedom to Work Act of 2000, which removed the retirement earnings test for individuals at the full retirement age and older. This paper examines the labor force activity of workers aged 65–69 relative to older and younger workers in response to the removal of the earnings test. We use the 1 percent sample of Social Security administrative data that covers the period from 4 years before to 4 years following the removal of the test. Quantile regression methods allow us to identify the earnings levels of workers who change their work effort.
Poverty-level Annuitization Requirements in Social Security Proposals Incorporating Personal Retirement Accounts
In the current discussions of Social Security reform, voluntary personal retirement accounts have been proposed. Recent research and debate have focused on several aspects of these accounts, including how such accounts would affect aggregate saving, system finances, and benefit levels. Little attention, however, has been paid to policies that would govern the distribution of account balances. This analysis considers such policies with respect to the annuitization of account balances at retirement using the Social Security Administration's Modeling Income in the New Term (MINT) model and a modified version of a recent legislative proposal to evaluate the effects of partial annuitization requirements.
Calculations of the median voter's return from "investing" in Social Security suggest that for a majority of voters the U.S. Social Security system provides higher ex-post, or actual, returns than alternative assets.
This paper provides a brief overview of the more important studies of lifetime redistribution under the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) programs. Studies are categorized into two types: those that focus on redistribution across successive cohorts of workers or typical members of those cohorts, and those that focus on the distribution of results across characteristics of interest within particular cohorts of workers. A list of related studies is provided at the end for those interested in additional reading.
This study uses Social Security administrative data on historical taxes and benefits by year, age, gender, and race for an ex post analysis of redistribution under the Disability Insurance program. The relationship between the taxes paid and benefits received to date under the program is described for successive cohorts as a whole and for specific race and gender groups both within cohorts and across time.
This paper discusses some of the major issues associated with the question of whether workers receive their money's worth from the Social Security program. An effort is made to keep the discussion as nontechnical as possible, with explanations provided for many of the technical terms and concepts found in the money's worth literature. Major assumptions, key analytical methods, and money's worth measures used in the literature are also discussed. Finally, the key findings of money's worth studies are summarized, with some cautions concerning the limitations and appropriate usage of money's worth analyses.
The Challenge of the 21st Century: Innovating and Adapting Social Security Systems to Economic, Social, and Demographic Changes in the English-Speaking Americas
The Social Security Programs in the United States are complex and have evolved over a long span of years. However, it is possible to categorize much of this experience into two different eras in which Social Security functioned in a distinctive environment, and a third era that is now beginning. The middle third of this century was an "age of invention," in which the programs grew rapidly under favorable social and economic conditions. Since then, the programs have experienced an "age of accommodation," in which growing financial constraints have permitted only limited changes in the program. We can look forward to an "age of maturation" in the decades to come, as most persons reaching retirement will have been covered by Social Security during their entire working careers. The declining ratio of workers to beneficiaries and a wide range of demographic and social changes will present significant challenges. The Social Security programs must change considerably to respond to the demands of a new era, and vigorous efforts to do so are underway.
This paper develops estimates of lifetime net transfers across cohorts under the Social Security Old-Age and Survivors Insurance (OASI) program. Estimates are developed both from the perspective of individual cohorts, indicating the extent to which each cohort has received or can expect to receive its money's worth from the program, and from the perspective of the OASI program, indicating the extent of redistribution across cohorts. This paper also contrasts intercohort redistribution under the present OASI program with the redistribution that would have occurred under two counterfactual pay-as-you-go programs that incorporate different implicit standards of fairness. The data sources and techniques employed in this analysis provide a more accurate and extensive description of the treatment of different cohorts under the OASI program than has been available to date. Estimates based on past or projected data are presented for all cohorts participating in the OASI program since its inception through the cohort born in 2050.
Simulating the Long-Run Aggregate Economic and Intergenerational Redistributive Effects of Social Security Policy
This paper reports on the status of a long-run simulation model of the U.S. economy and its relationships with the Social Security program that was designed with these considerations in mind. The model was developed specifically to analyze the potential equity and efficiency effects of alternative Social Security policies in a long-run context.
As a result of the buildup of the Old Age, Survivors, and Disability Insurance (OASDI) trust funds, the supply of U.S. securities to the public by the second and third decades of the next century might become extremely limited. While this increase in Federal savings would lower real interest rates and stimulate investment, the buildup would create a difficulty: it would force Federal Reserve open market operations to be conducted in assets other than Treasury securities. It is important to know whether monetary policy would continue to be effective under this new modus operandi. To answer this question it is necessary to have evidence concerning the transmission mechanism through which monetary policy affects the economy. Obtaining such evidence is especially important now since many economists argue that monetary policy works through a black box which we do not understand. Evidence demonstrating one channel though which monetary policy works is presented here. It is demonstrated that news of increases (decreases) in the Federal Reserve's target for the federal funds rate during the 1974–1979 period lowered (raised) stock prices. This period was unique because the Federal Reserve controlled its operating instrument, the federal funds rate, so closely that market participants were able to discern a change in the target on the day the target changed. This evidence supports the arguments of Tobin and Brunner and Meltzer that the stock market is an important link in the monetary transmission mechanism. The results indicate that if the OASDI trust funds purchased most or all Treasury securities, open market operations conducted using other assets would still be efficacious through this channel. By affecting bank reserves and thus the federal funds rate, these operations would influence stock prices and economic activity.
A Mathematical Demonstration of the Pareto Optimality of Pay-As-You-Go Social Security Programs in a Closed Economy
A 1989 article by Breyer concludes that it is impossible to compensate pensioners in the transition from a pay-as-you-go public pension system to a privatized or funded system without making at least one later generation worse off; Breyer reaches this conclusion in the context of a simple overlapping generations model of a closed economy under the assumption that the transition results in increased saving by workers. Although this conclusion is correct under the increased saving assumption in the relevant domain of the production function, the proof that Breyer provides is not sufficient to establish that fact. This note extends Breyer's analysis to provide a sufficient proof.
In recent years, a number of proposals have been advanced for privatizing all or part of the Social Security program in the United States. These proposals range from the immediate abolition to the gradual phasing-out of Social Security taxes and benefits. This paper evaluates several premises that often underlie privatization proposals—that rates of return in the private sector exceed those implicit in the Social Security program, that privatization would lead to an increase in national saving, and that privatization could somehow improve the lifetime welfare of all affected generations. The paper first considers whether rates of return in the private sector actually exceed those implicit in the Social Security program and discuss the conditions required for privatization to lead to an increase in national saving. The paper then demonstrates theoretically that an existing, well-managed, pay-as-you-go social security program is Pareto optimal in an economy with exogenous factor prices, regardless of the extent to which privately available rates of return exceed those implicit in the pay-as-you-go program; i.e., no privatization scheme can be found that benefits at least one present or future generation without harming at least one other generation, and no scheme can be found that allows the winners from privatization to compensate the losers and still come out ahead. The analysis is extended to incorporate the assumption of endogenous factor prices and the possibility that pay-as-you-go social security programs reduce private saving. The theoretical conclusions are illustrated by using a long-run economic projection model to simulate the aggregate economic and intergenerational redistributive effects of two stylized privatization schemes.
Some proponents of the privatization of the Social Security program in the United States have suggested that, because privately available rates of return exceed the internal rate of return implicit in that program, it may be possible to find Pareto-superior privatization schemes. In a similar vein, Townley (1981) argues that, so long as the government can incur debt, a Pareto-superior scheme can always be found to convert a dynamically inefficient pay-as-you-go Social Security program to a fully funded basis. This note uses Townley's own model to demonstrate analytically that Pareto-superior schemes to reverse a dynamically inefficient pay-as-you-go social security program do not exist, either through privatization or through conversion of the program to a fully funded basis.
This paper reports on an analysis of the consumption decisions of individuals. A consumption function is developed that can be viewed as an extension of the traditional life cycle-permanent income specification, with consumption determined as an age-specific proportion of current and prospective wealth. Special attention is focused on the degree of substitutability between current and prospective wealth and on the differential effects of the various types of prospective income flows on the consumption decision.
In a recent article in the Journal of Political Economy (Leimer and Lesnoy 1982), we presented new time series evidence that cast considerable doubt on earlier evidence presented by Martin Feldstein (1974) which implied that social security had a large and statistically significant negative effect on personal saving in the United States. Our results may be summarized as follows: First, the social security wealth variable used by Feldstein was seriously flawed as a result of a computer-programming error. Simply correcting this error substantially changes the estimated effect of social security on saving. Second, the statistical evidence depends upon assumptions which are embedded in the construction of the social security wealth variable. These assumptions relate, first, to how individuals form their expectations about the social security benefits they expect to receive and the social security taxes they expect to pay and, second, to estimates of the number of workers, dependent wives, and surviving widows who will receive benefits. Adopting reasonable assumptions that differ from those used by Feldstein leads to generally weaker estimates of the relationship between social security and saving. Finally, the estimated relationship between social security and saving is acutely sensitive to the period of estimation examined. We concluded that the time series evidence simply does not support the hypothesis that social security has substantially reduced personal saving in the United States.
The purpose of this paper is to consider several alternative specifications of the consumer expenditure function.
Social Security has sizable obligations to workers who contributed and made savings decisions in the anticipation of future benefits, and the assessment of future options must explicitly account for impacts on these as well as future participants. To this end, our paper develops cohort-specific, general-equilibrium comparisons of concrete policy alternatives.
The purpose of this paper is to investigate the effect of the social security system on the labor supply of aged men using U.S. time series data for the period 1947 to 1975. The specific phenomena to be explained is the dramatic decrease in the labor supply of aged men during this period. Between 1947 and 1975, the annual labor force participation rate of men 65 and over decreased from 47.8 percent to 21.7 percent—a decrease of 55 percent. In terms of annual hours worked per capita for men 65 and over, there was a decrease from about 880 hours to 312 hours during this period—a decrease of 65 percent. The specific focus of the analysis will be on the relative importance of social security in explaining this decrease in labor supply.
Social Security and Private Saving: A Reexamination of the Time Series Evidence Using Alternative Social Security Wealth Variables
In an important article in the Journal of Political Economy , Martin Feldstein estimated that the introduction of the social security system had reduced personal saving by 50 percent, with serious consequences for capital formation and output. His conclusion was based on a consumer expenditure function estimated with U.S. time series data and incorporating a social security wealth variable of his construction.
The original intent of this paper was to examine the sensitivity of Feldstein's conclusions to certain assumptions underlying his construction of the social security variable. In particular, we wanted to examine the implication of his assumptions concerning how individuals perceive future benefits and taxes.
Empirical evidence suggests that Social Security causes many individuals to retire earlier than otherwise. An important policy question is whether the program should be designed to lessen or eliminate this induced retirement effect. This paper proposes a framework for analyzing the socially desirable relationship between Social Security and retirement. Two common rationales for the program, forced saving and retirement insurance, are examined. If importance is attached to either of these rationales, then it is shown that retirement neutrality should probably not be a feature of Social Security.
In the recent economic literature on social security, much attention has been focused on its welfare implications (e.g., Samuelson ), and its impacts on individual retirement decisions (e.g., Boskin ), Sheshinski , Diamond and Mirrlees ) and capital accumulation (e.g., Feldstein , Munnell , and Kotlikoff ). In all these works, the level of social security is assumed to be exogenous although it is often determined in the real world by the desire of the majority of voters and thus is an endogenous variable of the economic system. While Browning  and Hu  did consider the determination of social security by a majority-voting process, they used the partial-equilibrium approaches in the sense that wages and the interest rate were assumed exogenous and independent of social security. The present paper constructs a simple three-period life-cycle model in which social security is determined by the majority-voting process, and the rate of interest by the demand for and supply of capital. In this framework, the tax rate voted by each person depends on the market rate of interest, which in turn is affected by the prevailing tax rate. It is assumed that social security is financed by a pay-as-you-go plan.
One-period models predict that a substantial welfare gain would result from removing the Social Security earnings test. In this paper we show that such models overestimate the size of potential gains.
If one uses instead a two-period model, which captures intertemporal effects, the net result of removing the earnings test is ambiguous. In the presence of a personal income tax, workers who reduce their labor supply in the first period create a welfare loss that must also be considered. We use a present-value model to estimate the change in lifetime welfare. We find that the net potential gain from removing the earnings test is probably small, especially when compared with the alternative of an increased personal income tax.
In late 1977, the U.S. Congress passed Social Security legislation that included a series of increases in the payroll tax. These increases, which began in 1979 and carry on into the 1980s, substantially raise the projected levels of the Social Security trust funds. Since the amendments were passed, there has been some discussion and several proposals to roll back part of the tax. It is highly likely that additional rollback proposals will be made in the near future. The purpose of this paper is to shed some light on some of the macroeconomic effects of a payroll tax rollback.
There is empirical evidence that in the recent past the Old-Age Insurance portion of the Social Security program has acted as a net wage subsidy. In addition, the program had significant intragenerational redistributive effects. Our purpose is to demonstrate how these findings alter conventional views of the labor supply effects of Social Security. Our method is the analysis of a labor supply model that is extended to include empirically significant operational components of the program. We show that the analyses of others are special cases of our more general approach.
This paper attempts to make two contributions to this research. The first one is expositional. A simple overlapping generation's model is developed and used to reinvestigate the wealth and endowment redistribution effects from the introduction of pay-as-you-go social security. Our second contribution is substantive and extends the analysis of the endowment redistribution effect. Finally, perspective is offered on the relationship between pay-as-you-go social security and private saving.