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How Effective is Redistribution Under the Social Security Benefit Formula?

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  • Alan L. Gustman
  • Thomas L. Steinmeier

Abstract

This paper uses earnings histories obtained from the Social Security Administration and linked to the survey responses for participants in the Health and Retirement Study to investigate redistribution under the current social security benefit formula. We find that as advertised, at the level of the individual respondent, the benefit formula is progressive. When individuals are arrayed by indexed lifetime earnings, own benefits are significantly redistributed from those with high lifetime earnings to those with low lifetime earnings. However, much of this apparent redistribution is from men to women, and when examined at the level of the family, from primary to secondary earners. When families are arrayed according the total lifetime earnings, and spouse and survivor benefits are taken into account, the extent of redistribution from families with high lifetime earnings to families with low lifetime earnings is roughly halved. Much of the remaining redistribution is from families where both spouses spend much of their potential work lives in the labor market, to families where a spouse, often with high earnings potential, chooses to spend a significant number of years outside of the labor force. When families are arrayed by their earnings potential, that is earnings during years when both spouses are engaged in substantial work, there is very little redistribution from families with high to low earnings capacity. Accordingly, at least for families on the verge of retirement today, introducing a simple system of privatized or other individual accounts, i.e., a system that ignored issues of redistribution, would have no major effect on the distribution of social security benefits net of taxes among families with different earnings capacities. Moreover, although privatized or other individual accounts would reduce redistribution from two earner to one earner families, the extent of that redistribution is greatly exaggerated when one compares benefits among individuals arrayed according to lifetime earnings.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7597.

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Date of creation: Mar 2000
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Publication status: published as Gustman, Alan L. and Thomas L. Steinmeier. "How Effective Is Redistribution Under The Social Security Benefit Formula?," Journal of Public Economics, 2001, v82(1,Oct), 1-28.
Handle: RePEc:nbr:nberwo:7597

Note: AG LS PE
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  1. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 2000. "The Progressivity of Social Security," NBER Working Papers 7520, National Bureau of Economic Research, Inc.
  2. Alan L. Gustman & Olivia S. Mitchell & Andrew A. Samwick & Thomas L. Steinmeier, . "Pension and Social Security Wealth in the Health and Retirement Study," Pension Research Council Working Papers 97-3, Wharton School Pension Research Council, University of Pennsylvania.
  3. Martin Feldstein & Jeffrey Liebman, 2000. "The Distributional Effects of an Investment-Based Social Security System," NBER Working Papers 7492, National Bureau of Economic Research, Inc.
  4. Panis, C.W.A. & Lillard, L.A., 1996. "Socioeconomic Differentials in the Returns to Social Security," Papers 96-05, RAND - Labor and Population Program.
  5. Alan L. Gustman & Thomas L. Steinmeier, 1995. "Privatizing Social Security: First Round Effects of a Generic, VoluntaryPrivatized U.S. Social Security System," NBER Working Papers 5362, National Bureau of Economic Research, Inc.
  6. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
    • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  7. Harriet Duleep, 1989. "Measuring socioeconomic mortality differentials over time," Demography, Springer, vol. 26(2), pages 345-351, May.
  8. Smith, James P, 1979. "The Distribution of Family Earnings," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 163-92, October.
  9. 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.
  10. Jeffrey B. Liebman, 2002. "Redistribution in the Current U.S. Social Security System," NBER Chapters, in: The Distributional Aspects of Social Security and Social Security Reform, pages 11-48 National Bureau of Economic Research, Inc.
  11. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 2002. "Long-Run Effects of Social Security Reform Proposals on Lifetime Progressivity," NBER Chapters, in: The Distributional Aspects of Social Security and Social Security Reform, pages 149-206 National Bureau of Economic Research, Inc.
  12. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 1999. "Distributional Impacts of Proposed Changes to the Social Security System," NBER Chapters, in: Tax Policy and the Economy, volume 13, pages 149-186 National Bureau of Economic Research, Inc.
  13. Anderson, Patricia M & Gustman, Alan L & Steinmeier, Thomas L, 1999. "Trends in Male Labor Force Participation and Retirement: Some Evidence on the Role of Pensions and Social Security in the 1970s and 1980s," Journal of Labor Economics, University of Chicago Press, vol. 17(4), pages 757-83, October.
  14. Alan L. Gustman & Thomas L. Steinmeier, 1999. "What People Don't Know About Their Pensions and Social Security: An Analysis Using Linked Data from the Health and Retirement Study," NBER Working Papers 7368, National Bureau of Economic Research, Inc.
  15. George J. Borjas, 1994. "The Economics of Immigration," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1667-1717, December.
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