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Americans' Dependency on Social Security

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  • Laurence J. Kotlikoff
  • Ben Marx
  • Pietro Rizza

Abstract

This paper determines the standard of living reductions that young, middle aged, and older households would experience were the U.S. government to cut Social Security benefits (but not taxes) to deal with its well documented (see Gokhale and Smetters, 2005) long-term fiscal crisis. To determine pre- and post-retirement living standards in the absence and presence of Social Security benefit cuts the paper relies on ESPlanner, a financial planning software program. ESPlanner calculates a household's highest sustainable living standard taking into account the household's economic resources including its claims to future Social Security benefits. The program also incorporates borrowing/liquidity constraints that limit households' abilities to smooth their living standards over their life cycles. The analysis considers both stylized single and married households of different ages and resource levels as well as actual households sampled from the 2004 Federal Reserve Survey of Consumer Finances (SCF). The extent of current and future living standard reductions in response to announcements of future Social Security benefit cuts depends critically on the age of the household, when the cuts are announced, the size of the cuts, the income of the household, and the degree to which the household is liquidity constrained. For our stylized households on the brink of retirement the complete elimination of Social Security benefits would entail retirement living standards reductions ranging from roughly one third to one hundred percent depending on the household's income. Our SCF findings also point to a strong dependency on Social Security. Indeed, 41 percent of older SCF couples and 33 percent of SCF singles would experience a living standard reduction of 90 percent or more were Social Security benefits eliminated. A surprising finding is the major dependency of very high-income households on Social Security. Take the highest earning couple in our stylized sample. This couple earns $500,000 per year from age 30 through age 64 when it retires. It enters retirement with over $2.3 million in assets. But given the length of its potential retirement, the modest real return it can safely earn on its assets, its off-the-top housing expenses, and its tax payments, this household is highly dependent on Social Security benefits, notwithstanding their taxable status. Indeed, were this household denied all its Social Security benefits on the eve of its retirement, it would suffer a 35.6 percent reduction in its living standard throughout retirement.

Suggested Citation

  • Laurence J. Kotlikoff & Ben Marx & Pietro Rizza, 2006. "Americans' Dependency on Social Security," NBER Working Papers 12696, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12696 Note: AG
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    References listed on IDEAS

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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," NBER Chapters,in: Tax Policy and the Economy, Volume 26, pages 125-163 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Laurence J. Kotlikoff & David Rapson, 2007. "Does It Pay, at the Margin, to Work and Save? Measuring Effective Marginal Taxes on Americans' Labor Supply and Saving," NBER Chapters,in: Tax Policy and the Economy, Volume 21, pages 83-144 National Bureau of Economic Research, Inc.
    2. Grech, Aaron George, 2012. "Evaluating the possible impact of pension reforms onfuture living standards in Europe," LSE Research Online Documents on Economics 51296, London School of Economics and Political Science, LSE Library.
    3. repec:cep:sticas:/161 is not listed on IDEAS

    More about this item

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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