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A Historical Welfare Analysis of Social Security: Who Did the Program Benefit?

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  • William Peterman

    (Federal Reserve Board of Governors)

Abstract

This paper builds a computational life cycle model and simulates the Great Depression in order to assess the historical welfare implications of implementing Social Security during this business cycle episode. A well established result in the literature is that when comparing steady states with and without Social Security in a standard life cycle model, long-run welfare tends to be lower with Social Security. Consistent with these previous results, this paper determines that on average in the steady state the original Social Security program lowers welfare by the equivalent of 4.5% of expected lifetime consumption. Moreover, the likelihood that this Social Security program causes a decrease in an agent's welfare in the steady state is 92%. However, this paper finds that the welfare effects of implementing Social Security on agents in the economy at the time the program is adopted is very different than the long-run welfare effects. In particular these living agents experience an increase in their lifetime welfare due to the implementation of Social Security that is equivalent to 4.4% of their expected future lifetime consumption. Moreover, the paper finds that the likelihood that these living agents experience an increase in their lifetime welfare due to the adoption of the program is 83%. The divergence in the short-run and long-run welfare effects is primarily driven by a slow adoption of payroll taxes and a quicker adoption of benefit payments. This divergence could be one explanation for why a program that decreases long-run welfare was originally implemented.

Suggested Citation

  • William Peterman, 2014. "A Historical Welfare Analysis of Social Security: Who Did the Program Benefit?," 2014 Meeting Papers 790, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:790
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    References listed on IDEAS

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    1. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, vol. 99(1), pages 25-48, March.
    2. William B. Peterman & Kamila Sommer, 2019. "How Well Did Social Security Mitigate The Effects Of The Great Recession?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(3), pages 1433-1466, August.
    3. Hong, Jay H. & Rios-Rull, Jose-Victor, 2007. "Social security, life insurance and annuities for families," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 118-140, January.
    4. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 1999. "The risk-sharing implications of alternative social security arrangements," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 213-259, June.
    5. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, May.
    6. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(1), pages 83-114, June.
    7. William B. Peterman, 2016. "Reconciling Micro And Macro Estimates Of The Frisch Labor Supply Elasticity," Economic Inquiry, Western Economic Association International, vol. 54(1), pages 100-120, January.
    8. Luigi Pistaferri, 2003. "Anticipated and Unanticipated Wage Changes, Wage Risk, and Intertemporal Labor Supply," Journal of Labor Economics, University of Chicago Press, vol. 21(3), pages 729-754, July.
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    Cited by:

    1. Daniel Harenberg & Alexander Ludwig, 2019. "Idiosyncratic Risk, Aggregate Risk, And The Welfare Effects Of Social Security," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(2), pages 661-692, May.
    2. Caliendo, Frank N. & Findley, T. Scott, 2020. "Dynamic Consistency and Regret," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 342-364.

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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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