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Americans' Dependency on Social Security

Listed author(s):
  • Laurence Kotlikoff

    (Boston University)

  • Ben Marx

    (Boston University)

  • Pietro Rizza

    (Boston University)

According to a recent estimate by Gokhale and Smetters (2005), the present value difference between the U.S. government’s projected future expenditures and its projected future tax receipts exceeds $60 trillion. Closing this enormous fiscal gap requires a variety of different tax increases and expenditure reductions. In this paper we examine how potential Social Security benefit cuts would impact the wellbeing of different American households. Specifically, we examine the living standard impacts of immediate and permanent 30 percent and 100 percent cuts in Social Security benefits. We examine cuts of these magnitudes to illustrate the dependency of the population on Social Security and to help policymakers calibrate the cost to Americans of this form of policy adjustment. The extent of current and future living standard reductions in response to announcements of future Social Security benefit cuts depends on the age of the household, when the cuts are announced, the size of the cuts, and the income of the household. Social Security benefit cuts of 30 percent, if announced when a household is about to retire, can lead to retirement living standard reductions ranging from roughly one tenth to one third depending on the household’s income. These reductions in living standard are substantially reduced if the household learns at younger ages about the benefit cuts and, consequently, has a longer time period over which to adjust.

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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp126.

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Length: 59 pages
Date of creation: Sep 2006
Handle: RePEc:mrr:papers:wp126
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  1. Jagadeesh Gokhale & Kent Smetters, 2005. "Measuring Social Security’s Financial Problems," Working Papers wp093, University of Michigan, Michigan Retirement Research Center.
  2. Francisco J. Gomes & Laurence J. Kotlikoff & Luis M. Viceira, 2012. "The Excess Burden of Government Indecision," Tax Policy and the Economy, University of Chicago Press, vol. 26(1), pages 125-164.
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