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Social Security's Treatment of Postwar Americans: How Bad Can It Get?

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  • Jagadeesh Gokhale
  • Laurence J. Kotlikoff

Abstract

As currently legislated, the U.S. Social Security System represents a bad deal for postwar Americans. Of every dollar postwar Americans have earned or will earn over their lifetimes, over 5 cents will be lost to the Old Age Survivor Insurance System (OASI) in the form of payroll taxes paid in excess of benefits received. This lifetime net tax rate can also be understood by comparing the rate of return postwar contributors receive from OASI and the return they can earn on the market. The OASI return -- 1.86 percent -- is less than half the return currently being paid on inflation-indexed long-term government bonds, and the OASI return is much riskier. Of course, Social Security is an insurance as well as a net tax system. But, viewed as an insurance company, the insurance OASI sells (or, rather, forces households to buy) is no bargain. The load charged averages 66 cents per dollar of premium. These findings, developed in an extensive micro simulation study by Caldwell, et al. (1999), assume that current law can be maintained through time. But Social Security faces a staggering long-term funding problem. Meeting the system's promised benefit payments on an ongoing basis requires raising the OASDI 10.8 tax rate immediately and permanently by two fifths! How bad can Social Security's treatment of postwar Americans get once adjustments are made to save' the system? This paper examines that question using the machinery developed in Caldwell, et al. Specifically, it considers Social Security's treatment of postwar Americans under alternative tax increases and benefit cuts that would help bring the system's finances into present value balance. The alternatives include immediate tax increases, eliminating the ceiling on taxable payroll, immediate and sustained benefit cuts, increasing the system's normal retirement ages beyond those currently legislated, switching from wage to price indexing in calculating benefits, and limiting the price indexation of benefits. The choice among these and other alternatives have important consequences for which postwar generations and which members of those generations will be forced to pay for the system's long-term financing problems.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7362.

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Date of creation: Sep 1999
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Publication status: published as Jagadeesh Gokhale, Laurence J. Kotlikoff. "Social Security’s Treatment of Postwar Americans. How Bad Can It Get?," in Martin Feldstein and Jeffrey B. Liebman, editors, "The Distributional Aspects of Social Security and Social Security Reform" University of Chicago Press (2002)
Handle: RePEc:nbr:nberwo:7362

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  1. Steven Caldwell & Melissa Favreault & Alla Gantman & Jagadeesh Gokhale & Thomas Johnson, 1998. "Social Security's Treatment of Postwar Americans," NBER Working Papers 6603, National Bureau of Economic Research, Inc.
  2. Michael J. Boskin & Laurence J. Kotlikoff & Douglas J. Puffert & John B. Shoven, 1987. "Social Security: A Financial Appraisal Across and Within Generations," NBER Working Papers 1891, National Bureau of Economic Research, Inc.
  3. Anthony Pellechio & Gordon Goodfellow, 1983. "Individual Gains and Losses from Social Security before and after the 1983 Amendments," Cato Journal, Cato Journal, Cato Institute, vol. 3(2), pages 417-442, Fall.
  4. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 1999. "Distributional Impacts of Proposed Changes to the Social Security System," NBER Working Papers 6989, National Bureau of Economic Research, Inc.
  5. Michael D. Hurd & John B. Shoven, 1986. "The Distributional Impact of Social Security," NBER Working Papers 1155, National Bureau of Economic Research, Inc.
  6. Lee, Ronald & Tuljapurkar, Shripad, 1998. "Uncertain Demographic Futures and Social Security Finances," American Economic Review, American Economic Association, vol. 88(2), pages 237-41, May.
  7. Peter Diamond & Jonathan Gruber, 1997. "Social Security and Retirement in the U.S," NBER Working Papers 6097, National Bureau of Economic Research, Inc.
  8. Ronald Lee & Shripad Tuljapurkar, 1997. "Death and Taxes: Longer life, consumption, and social security," Demography, Springer, vol. 34(1), pages 67-81, February.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Is Social Security a Ponzi Scheme?
    by Alex Tabarrok in Marginal Revolution on 2011-09-10 16:47:19
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Cited by:
  1. Jagadeesh Gokhale & Laurence J. Kotlikoff & Alexi Sluchynsky, 2002. "Does it pay to work?," Working Paper 0206, Federal Reserve Bank of Cleveland.
  2. Tosun, Mehmet Serkan, 2008. "Endogenous fiscal policy and capital market transmissions in the presence of demographic shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 2031-2060, June.

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