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Differential mortality and the progressivity of social security

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  • Bagchi, Shantanu

Abstract

There is a well-established negative correlation between earnings and mortality risk. Using a calibrated general-equilibrium macroeconomic model, this paper examines how this correlation interacts with the welfare implications of Social Security's benefit-earnings rule. My primary findings suggest that the welfare ranking of alternative benefit-earnings rules is somewhat sensitive to differential mortality. Due to their relatively high mortality risk, households with unfavorable earnings histories heavily discount the expected utility from old-age consumption, and therefore do not put much weight on better work-retirement consumption smoothing. Because of this reason, Social Security's benefit-earnings rule warrants less redistribution in the presence of differential mortality, compared to when mortality risk is uncorrelated to earnings. I find that this result continues to hold when household-level labor supply distortions are ignored, and also when an alternative “maximin” welfare criterion is considered, but not when accidental bequests from the deceased are redistributed to the survivors.

Suggested Citation

  • Bagchi, Shantanu, 2019. "Differential mortality and the progressivity of social security," Journal of Public Economics, Elsevier, vol. 177(C), pages 1-1.
  • Handle: RePEc:eee:pubeco:v:177:y:2019:i:c:3
    DOI: 10.1016/j.jpubeco.2019.07.003
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    Cited by:

    1. Monisankar Bishnu & Nick L. Guo & Cagri S Kumru, 2017. "Social Security: Progressive Benefits but Regressive Outcome?," ANU Working Papers in Economics and Econometrics 2017-656, Australian National University, College of Business and Economics, School of Economics.
    2. Haan, Peter & Kemptner, Daniel & Lüthen, Holger, 2017. "The Rising Longevity Gap by Lifetime Earnings: Distributional Implications for the Pension System," IZA Discussion Papers 11121, Institute of Labor Economics (IZA).

    More about this item

    Keywords

    Differential mortality; Social Security; Mortality risk; Labor income risk; Incomplete markets; Social insurance;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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