The joint labor supply decision of married couples and the U.S. Social Security pension system

Abstract

The current U.S. Social Security program redistributes resources from high-wage workers to low-wage workers through its progressive benefits schedule and from two-earner married couples and single workers to one-earner married couples through the program's spousal and survivors benefits. This paper extends a standard general-equilibrium overlapping-generations model with uninsurable wage shocks to analyze the effect of spousal and survivors benefits on the labor supply of married households and the overall economy. The heterogeneous-agent model calibrated to the U.S. economy predicts that removing spousal and survivors benefits would increase the female labor participation rate by 1.5–1.6%, women's total work hours by 1.7–1.8%, and the total output of the economy by 0.5–0.6% in the long run. A phased-in cohort-by-cohort removal of these benefits would make all age cohorts, on average, better off under the balanced-budget assumption, although the policy change would make the majority of young married households worse off in the short run.