Distributional Analysis of Pension and Social Security Reforms

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Abstract

In April 2008, the Urban Institute convened an expert panel of researchers inside and outside of government agencies to discuss how best to perform distributional analyses of proposals to reform Social Security and private pensions. The panel discussed key technical issues, including how to measure the baseline income distribution and characterize current policies, how to address changes that alter the timing of taxes and benefits, and how to measure and report gains and losses from policy interventions. The group revealed diverse viewpoints, but we conclude that current methods used in recent UI research fall within the range of reasonable alternatives.

Introduction

The aging of the large baby boomer cohorts will create financial challenges for both Social Security and private pension systems by raising the ratio of retirees collecting benefits to workers paying into retirement funds. The Trustees of the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds (Social Security Trustees 2008) project that the current operating surplus of the trust funds as a percentage of taxable payroll will decline after 2008 and that outlays will exceed trust fund receipts (excluding interest) beginning in 2017. They project that the OASDI trust fund balance will reach zero in 2041, after which projected receipts will cover about 78 percent of projected outlays.

To address the long-term funding problem in Social Security, policymakers may consider reducing benefits, increasing taxes, or a combination of both. Policymakers may also consider proposals to restructure the benefit formula and proposals to supplement or replace a portion of retirement benefits with contributions to individual accounts.

For potential reforms under consideration, policymakers will be concerned about how they affect vulnerable groups in the population and, more generally, how the gains and losses they produce are distributed among people in different income and demographic groups. In April 2008, the Urban Institute convened an expert panel of researchers inside and outside government agencies to discuss methods for performing these distributional analyses. The panel met at the Urban Institute and discussed key methodological issues in distributional analysis of Social Security. Panelists received a document summarizing the key technical issues before the meeting. This paper combines a summary of these issues with a summary of the expert panel’s discussion. We discuss the main areas of consensus and disagreement among the panelists and highlight issues that require additional research and analysis.

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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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