Labor Supply Responses to Social Security

The President’s Commission to Strengthen Social Security suggests three plans for reforming Social Security. These plans divert various amounts of the payroll tax to a personal account if the worker chooses to participate in the account. In return, Social Security benefits are offset using accounts with real returns ranging from 2% to 3.5%. In addition, the second and third plans proposed by the Commission include features that are designed to balance the finances of the system by reducing the rate of growth of benefits relative to the levels prescribed under current law, to make the system more redistributive, and to make other changes. When “personal accounts ” are mentioned, most people think of accounts that are in some sense separate and shielded from the uncertainties of the Social Security system. That is not the case for the personal accounts proposed by the Commission. Because the participating individual is not entitled to the principal in the account, participating in the account does not shield the individual from the political risks of being in the Social Security system. As a result, the reduction in political risk fostered by the Commission’s proposals comes mainly from the improvement in the financial status of the system fostered by other provisions of the recommended plans. Measures to improve the benefits of low-income individuals, widows and widowers and to enhance the rewards to retirement all create incentive effects that are also discussed in the paper.

Precautionary Saving Over the Lifecycle

This paper studies the quantitative importance of precautionary wealth accumulation relative to life—cycle saving for retirement. Section 1 examines panel data on earnings from the PSID. Using a bivariate normal model of random effects, we find that second— period—of—life earnings are strongly positively correlated with initial earnings but have a higher variance. Section 2 studies the consequences for life—cycle saving. Households know their youthful earning power as they enter the labor market, but only in midlife do they learn their actual second—period earning ability. For plausible calibrations, precautionary saving only adds 5—6% to aggregative life—cycle wealth accumulation. Nevertheless, we find that, given borrowing constraints on households’ behavior, the variety of earning profiles that our bivariate normal model generates itself stimulates more than twice as much extra wealth accumulation as precautionary saving.

Secular Changes in Wealth Inequality and Inheritance

Data suggest the distribution of wealth among households in the United States and the United Kingdom has become more equal over the last century — though the pattern may have reversed recently. This paper shows that a model in which all households save for life–cycle reasons and some for dynastic purposes as well offers a possible explanation: the model predicts rising cross–sectional equality of wealth when longevity increases. In terms of recent changes, the model suggests that expansion of social security programs and government debt can lead toward more wealth inequality, and that slower growth may do the same.

Transition Paths and Social Security Reform

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Technological Progress and Worker Productivity at Different Ages

Economists have long thought of technological progress as a primary determinant of rising living standards over time. One might think of technological progress as increasing the “effectiveness” of labor, thereby raising the amount of output that each unit of labor can produce. The purpose of this paper is to ask whether, as an empirical matter, technological progress increases the productivity of workers evenly, or whether it augments the effectiveness of young workers the most. As low birthrates and increases in longevity lead to an “aging” of the population, the productivity of older workers relative to younger workers is likely to become an ever more important issue. Analyzing data from the decennial Censuses and annual data from the Current Population Survey, this paper draws three tentative conclusions. First, we find that the “aging” of the U.S. work force seems more likely to increase aggregate productivity – by raising the proportion of laborers with sizable accumulations of human capital from experience – than to decrease it – by slowing the adoption rate for innovations. Our preliminary estimates imply that the latter effect is of modest magnitude. Second, since our preliminary estimates point to “general” rather than “specific” technological progress, each household faces a problem of having to predict the course of technological progress over its life span. This means that households face more risk than otherwise, and it complicates the specification of the life-cycle model that analysts should employ. Third, when we disaggregate across education groups, the groups show quite unequal benefits from technological progress after 1980, and this may lead to further challenges in modeling household behavior.

Life-Cycle Models: Lifetime Earnings and the Timing of Retirement

After dropping for a century, the average retirement age for U.S. males seems to have leveled off in recent decades. An important question is whether as future improvements in technology cause wages to rise, desired retirement ages will resume their downward trend, or not. This paper attempts to use HRS panel data to test how relatively high (or low) earnings affect male retirement ages. Our goal is to use cross-sectional earning differences to help anticipate likely time-series developments in coming decades. Our preliminary regression results show that higher earnings do lead to somewhat earlier retirement. Unless additional analysis changes the parameter estimates, the implication is that the downward trend in male retirement ages will ultimately return.

Consumption, Retirement, and Social Security: Evaluating the Efficiency of Reform with a Life-Cycle Model

This paper analyzes the effect of a potential reform to the Social Security system on individuals’ retirement and consumption choices. We first estimate the coefficients for a life-cycle model. We assume intratemporally nonseparable preference orderings and endogenous retirement. Our framework allows the possibility of disability. The specification predicts a change in consumption at retirement; we use the empirical magnitude of the change, together with desired retirement age, to identify key parameters such as the curvature of the utility function. We then qualitatively and quantitatively study the possible long-run effect of a Social Security reform in which individuals no longer face the OASI payroll tax after some specified age, and their subsequent earnings have no bearing on their Social Security benefits. Simulations indicate that retirement ages would rise by as much as one year, equivalent variations could average $5000 (1984 dollars) per household or more, and reform could generate$2500 or more additional income tax revenue per household.

Intergenerational Transfers in the Health and Retirement Study Data

Many economic analyses of public policy issues are based upon the life-cycle model of household behavior. The usual formulation omits private intergenerational transfers. This paper considers the possibility of a more sophisticated formulation that includes the latter. We examine 1992-2008 HRS data on inheritances and inter vivos gifts. We uncover an underreporting problem in the data: a household’s financial respondent often seems to understate transfers from his/her in-laws. Nevertheless, other aspects of the data seem very useful. About 30-40 percent of households eventually inherit. Inheritances seem to reflect a mixture of intentional and accidental bequests, with the latter twice as prevalent.

Estimating Life—Cycle Parameters from Consumption Behavior at Retirement”

Using pseudo-panel data, we estimate the structural parameters of a life—cycle consumption model with discrete labor supply choice. A focus of our analysis is the abrupt drop in consumption upon retirement for a typical household. The literature sometimes refers to the drop, which in the U.S. Consumer Expenditure Survey we estimate to be approximately 16%, as the “retirement—consumption puzzle.” Although a downward step in consumption at retirement contradicts predictions from life—cycle models with additively separable consumption and leisure, or with continuous work-hour options, a consumption jump is consistent with a setup having nonseparable preferences over consumption and leisure and requiring discrete work choices. This paper specifies a life—cycle model with these latter two elements, and it uses the empirical magnitude of the drop in consumption at retirement to provide an advantageous method of identifying structural parameters–most importantly, the intertemporal elasticity of substitution.

WP 2018-386

A number of proposals and options to address OASI trust-fund solvency have been suggested in recent years. The present work attempts to examine solvency-promoting reforms from the standpoint of economic efficiency — that is, from the perspective of their effect on household and societal well-being. Ultimately, we argue that solvency and efficiency should be joint considerations for policy. We first set up a structural model of household consumption/saving and retirement choices. We estimate the model’s parameters using Consumer Expenditure Survey and Health and Retirement Study data. Then we simulate policy changes. Using the 2017 Social Security Trustee’s Report, we examine policy changes that could prevent trust fund depletion for 75 years or more. In the simulations, payroll tax increases or Social Security benefit reductions sufficient to ensure solvency have modest effects on household labor supply, though they lower lifetime consumption and utility. Earlier work considered age-targeted payroll tax changes that could promote longer careers. Here, we examine possible changes to the Social Security benefit formula — specifically the AIME formula — that could encourage delayed retirement more straightforwardly. We show that incentivizing an extra one to two years of work on average might be possible. That would generate substantial new tax revenues, from both payroll and income taxes. Although sacrificed leisure would lead to household utility reductions, they are relatively small — comparable to the best alternatives. Comparing the results with simpler tax and benefit changes, we suggest that promoting longer careers could enlarge the set of policy options in a useful way.The Social Security Administration, Grant number RRC08098401-10, R-UM18-10https://deepblue.lib.umich.edu/bitstream/2027.42/148124/1/wp386.pdfDescription of wp386.pdf : Working pape