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Why hasn't Social Security changed since 1977?

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  • Pavel Brendler

    (University of Bonn)

Abstract

Despite increasing earnings inequality and aging population, there has been no major reform of Social Security since 1977. To account for this puzzling observation, I construct a heterogeneous agent model with incomplete financial markets. There is a government who chooses the replacement rate schedule by maximizing the weighted welfare of all generations alive. I specify the Pareto weights as a function of household's age and identify them both in 1977 and 2018. I find that there was a slight bias towards younger workers in 1977. However, the bias has shifted towards older households in 2018. This shift is a result of counteracting forces induced by: 1) population aging and 2) increased labor productivity risk and increased college premium. The effect of population aging turns out to be stronger quantitatively. (Copyright: Elsevier)

Suggested Citation

  • Pavel Brendler, 2020. "Why hasn't Social Security changed since 1977?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 134-157, April.
    • Handle: RePEc:red:issued:19-49
    DOI: 10.1016/j.red.2019.09.001
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    Cited by:

    1. Brendler, Pavel, 2023. "Rising earnings inequality and optimal income tax and social security policies," Journal of Monetary Economics, Elsevier, vol. 134(C), pages 35-52.
    2. Wu, Chunzan, 2021. "More unequal income but less progressive taxation," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 949-968.

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    More about this item

    Keywords

    Economic inequality; Optimal tax; Pareto weights; Political inequality; Redistribution; Social Security;
    All these keywords.

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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