The Progressivity of Social Security∗

Abstract

How much does the current social security system redistribute from rich to poor? We propose alternative concepts of well-being that can be used to classify individuals from rich to poor, and we show how social security redistributes differently under each concept. We use the PSID to estimate lifetime wage profiles and actual earnings each year for a sample of 1778 individuals, and we use mortality probabilities to calculate expected payroll taxes and social security benefits. For a given set of “facts ” about the net flows experienced each year by each individual, measured progressivity depends on many assumptions. This paper attempts to capture and to quantify all of the data and characteristics relevant to determine each individual’s “income ” under several def-initions. We then use each definition of income to classify individuals from rich to poor and to calculate the progressivity of social security. We proceed in seven steps. First, we classify individuals by annual income and use Gini coef-ficients to find that social security is highly progressive. Second, we reclassify individuals on the basis of lifetime income and find that social security is less progressive. Third, we remove the cap on measured earnings and find that social security is even less progressive. Fourth, we switc