Labor Force Trends and Future Social Security Benefits

Abstract

Trends in employment and earnings patterns in the population, particularly the increase in the number of two-earner couples, create a hurdle for the long-term modeling of Social Security, because benefits are intricately related to employment and earnings. The spouse and widow benefits of women who are eligible for their own retired worker benefits are particularly problematic because of the dual entitlement reduction under which a woman's spouse or widow benefit is reduced, dollar for dollar, by any increase in the woman's retired worker benefit. This paper examines a technique that allows long-term macromodeling of the economy to incorporate these intricate effects. The technique makes use of a microsimulation model of individual workers, with the microsimulation model specified in such a way that the earnings and employment of its individuals can be constrained to meet specified calendar-year projections for aggregate employment and earnings. The technique is used to carry out a 75-year analysis, examining the sensitivity of Social Security taxes and benefits to changes in women's employment and earnings under three scenarios: an increase in women's employment holding average earnings constant, an increase in women's earnings holding employment constant, and a simultaneous increase in both employment and average earnings. As expected, the dual entitlement reduction limits the increase in benefits for many of the women. Over the 75-year period the increase in payroll taxes from women's higher earnings will more than offset the increase in benefits from their earnings. The simulations indicate, however, that there is an additional effect from higher women's earnings through the national average wage indexing series, which is used to set the overall level of benefits. By raising the national wage index, higher women's earnings can increase the overall level of benefits, thereby offsetting some or all of the increase in payroll taxes.