Lifetime Distributional Effects of Social Security Retirement Benefits

The research report herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA), to the Boston College Center for Retirement Research (CRR). The opinions and conclusions are solely those of the authors and should not be construed as representing the opinions or policy of SSA or any agency of the Federal Government or of the CRR. They also do not necessarily reflect the views of The Urban Institute, its Board or its Sponsors. The authors would like to acknowledge the outstanding research assistance of Jillian Berk.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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1. Introduction

Many people believe that the combination of payroll taxes and benefits of the Old Age and Survivors Insurance (OASI) portion of Social Security on balance redistributes income from higher income to lower income couples and individuals. The combination of a flat rate payroll tax and a benefit formula that replaces a higher share of earnings for workers with low lifetime earnings appears to provide a net redistribution to lower income groups.

The view that OASI redistributes income to the less well-off has been challenged, however, by recent research using longitudinal data sets. Gustman and Steinmeier (2000) note, for example, that the progressive benefit formula in OASI applies to earnings of individuals, not couples. Much of the apparent redistribution of OASI takes place within couples, with high-earning workers contributing to the benefits of their low-earning spouses. Most of the remaining redistribution is eliminated if one counts the potential earnings of nonworking spouses (who receive substantial benefits from OASI) in a measure of total lifetime earning capacity. Coronado, Fullerton, and Glass (2000) make these same adjustments and also incorporate mortality probabilities that differ by potential lifetime income. When they adjust for the longer life spans of those with higher incomes, they find that the Social Security system is on balance regressive.

This paper provides new evidence on how OASI redistributes income among groups, based on simulations using the Model of Income in the Near Term (MINT), a microsimulation model developed at the Social Security Administration. We present alternative measures of actual and projected net benefits (benefits minus payroll taxes) from OASI for a sample of individuals in the 1931-60 birth cohorts. Our simulations take account of marital histories, income and tax-burden sharing within couples, and differences in life expectancy among subgroups of the population.

A main theme of the paper is how the effects of OASI on income distribution are changing over time, partly because of changes in tax rates and benefits, but more importantly because of changing demographics and earnings patterns of the workforce. Another main theme is the importance of considering the interactions of auxiliary benefits (spousal and survivor benefits) with changing individual circumstances (divorce, remarriage, widowhood) in determining the net effects of OASI on income distribution. Over time, the reduced importance of auxiliary benefits (due to higher lifetime earnings of women [Fullerton 1999; Hayghe 1990, 1993, 1997; Wetzel 1990] and the increase in the proportion of retirees who are divorced [Clarke 1995]) makes OASI more progressive for future cohorts than for cohorts who retired in the 1990s, even as the net benefit from OASI declines (Social Security Administration 2001).

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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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