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Title: Rising Earnings Inequality and Optimal Social Security

Citation Type: Miscellaneous

Publication Year: 2021

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Abstract: Cross-sectional earnings inequality has risen sharply since the late 1970s in the United States. It remains an open question how this development has affected the insurance and income redistribution roles played by Social Security. The paper's first question is: How have the government preferences over insurance and redistribution evolved during the past four decades? I answer this question quantitatively by constructing a rich overlapping generations model. My findings indicate that the government has become less willing to provide insurance to young workers and redistribute from high-ability to low-ability households. Simultaneously, it has become more willing to tolerate income redistribution from workers toward retired households. To quantify the welfare consequences of the shift in government preferences, I ask the second question: How should Social Security have responded to inequality had the government preferences remained unchanged? Compared to the optimal policy, the current system induces a welfare loss equal to 1.2 percent in consumption equivalent terms. Finally, I show that each driving force of cross-sectional earnings inequality has a differential impact on the optimal policy.

Url: https://www.cesifo.org/sites/default/files/2021-03/pe21_Brendler_Optimal_Social_Security.pdf

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Authors: Brendler, Pavel

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Data Collections: IPUMS CPS

Topics: Labor Force and Occupational Structure

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