INTERGENERATIONAL REDISTRIBUTION UNDER SOCIAL SECURITY

Abstract

Most public finance analysts recognized the significant redistributive aspects of our current social security system — intragenerational and intergenerational transfers. The intragenerational redistribution is fairly straightforward and well documented. Even though the intergenerational transfers are easily understood and generally agreed upon, the magnitudes of these transfers are not so well reported. The purpose of this paper is to estimate the size of the intergenerational redistribution that has occurred and will continue to occur as a result of our pay‐as‐you‐go system of social security. Based upon average earnings, tax rates, and benefits received under social security, it is possible to estimate the relationship between taxes paid and benefits received for representative individuals who have worked and retired under social security. The preliminary analysis suggests that the usual conclusion about intergenerational redistribution is fundamentally correct, but needs modifying. This research shows that although the earliest retirees received the highest internal rates of return, in terms of real benefits in excess of taxes paid, those individuals who retired between 1970 and 1980 received the largest inflation adjusted transfers. Further, according to the analysis, social security has paid retirees in the aggregate more than $4.5 trillion dollars in benefits above what the recipients have paid in taxes. By the year 2020, when retirees are expected to receive in benefits the amount paid in taxes, this cumulative excess is projected to be about $9.2 trillion.