Social Security Reform with Heterogeneous Mortality

Abstract

Using a heterogeneous-agent, life-cycle model of Social Security claiming, labor supply and saving, we consider the implications of lifespan inequality for Social Security reform. Quantitative experiments show that welfare is maximized when baseline benefits are independent of lifetime earnings, the payroll tax cap is kept roughly unchanged, and claiming adjustments are reduced. Eliminating the earnings test and the income taxation of Social Security benefits provides additional gains. The Social Security system that would maximize welfare in a 2050 demographics scenario, characterized by longer lifespans and an increased education-mortality gradient, is similar to the one that would maximize welfare today.