Distribution Of Lifetime Income Research Articles

Social Security reform: three Rawlsian options

To maintain long-run solvency in light of changing demographics, the US Social Security system needs to be reformed. We present three reform options that protect the retirement benefits of the economically vulnerable while also balancing the Social Security budget. We refer to these three options as Rawlsian reforms because, with each reform option, the Social Security benefits of those at the low end of the income distribution are left intact. Two of our reforms break the link between the benefit cap and the tax cap by lowering the benefit cap. We explore the effect of each reform on ex-ante expected utility, the distribution of private savings, and the distribution of lifetime income in a life-cycle model.

The Research of Income distribution Effect of the Extending Coverage of the Basic Pension Insurance System in China

This paper uses a general equilibrium framework to establish a heterogeneity inter-temporal overlapping dynamic general equilibrium model of basic pension insurance system combining social pooling with personal accounts. Then it introduces the main content of Guo Fa [2005] No.38 and focuses on the income distribution and redistribution effects of the extending coverage of basic pension insurance system by policy simulation, parameter estimation, and sensitivity test. And it makes the theoretical derivation and empirical estimates. The results are shown as follows:firstly, the extending coverage of basic pension insurance system has significant income distribution and redistribution effects, and the redistribution effect is progressive, namely the income transformation from high earners represented by urban enterprise workers to low earners represented by flexible employees and migrant workers; secondly, personal accounts have played a smoothing role, which help to improve lifetime income distribution of different types of workers, but are not conducive to the improvement of income redistribution; thirdly, social pooling accounts have a strong income redistribution effect, which are in favor of income redistribution between different types of workers and narrow the income gap. Parameter sensitivity tests show that the conclusions are robust. Therefore, further optimization of social pooling accounts helps to reduce income inequality.

Lifetime Receipt of Inheritances and the Distribution of Wealth in England

AbstractWe investigate the impact of inheritances and gifts received on the distribution of wealth. Whereas previous work has looked only at marketable wealth, we consider broader measures of wealth including state and private pensions. We find that once pension wealth is included, inheritances and gifts no longer have an equalising impact on the distribution of wealth. Without pension wealth, including wealth transfers reduces the Gini coefficient for wealth from 0.57 to 0.52. With pension wealth, the impact is negligible. We argue that this latter effect gives a better indication of the impact of inheritances on the distribution of lifetime income.

Inequality in current and lifetime income

To gauge inequality in living standards, the distribution of lifetime income is likely to be more relevant than the distribution of current income. Yet, empirical studies of income inequality are typically based on observations of income for one or a few years. In this paper, we exploit a unique data set with nearly career-long income histories to assess the role of so-called life-cycle bias in empirical analysis of income inequality that uses current income variables as proxies for lifetime income. We find evidence of substantial life-cycle bias in estimates of inequality based on current income. One implication is that cross-sectional estimates of income inequality are likely to be sensitive to the age composition of the sample. A decomposition of the life-cycle bias into income mobility and heterogeneous profiles reveal the importance of two explanations that have been put forth to explain the disagreement between current and lifetime inequality.

Distributive Effects of Israel’s Pension System

This paper examines several aspects of Israel's restructured retirement benefits system, focusing on distributive effects. We characterize 10 stylized representative prototypes of Israeli households, reflecting common demographic, wage and employment profiles. These prototypes are used to examine the joint effects of tax benefits for pensions and the public Old Age Allowances program's contributions and disbursements on the lifetime income distribution, net replacement rates at retirement and lifetime consumption smoothing. We find that the system is neutral in terms of its effect on lifetime income distribution, except for the top income decile which gains less than the others. We also find that pension savings result in a net loss for many low-income households, unsmooth their consumption and lead to 'too high' post-retirement net replacement rates. Furthermore, evidence from a unique dataset point to rational and active behavior of households with respect to these incentives, raising questions about the necessity of compulsory pension savings which were enacted in Israel recently.

Distributive Effects of Israel's Pension System

This paper examines several aspects of Israel's restructured retirement benefits system, focusing on distributive effects. We characterize 10 stylized representative prototypes of Israeli households, reflecting common demographic, wage and employment profiles. These prototypes are used to examine the joint effects of tax benefits for pensions and the public Old Age Allowances program's contributions and disbursements on the lifetime income distribution, net replacement rates at retirement and lifetime consumption smoothing. We find that the system is neutral in terms of its effect on lifetime income distribution, except for the top income decile which gains somewhat less than the others. We also find that pension savings result in a net loss for many low-income households, unsmooth their consumption and lead to too high post-retirement net replacement rates. Furthermore, evidence from a unique dataset point to rational and active behavior of most households with respect to these incentives. These findings suggest that the parameters of the retirement-age benefits system should be adjusted following the introduction of mandatory pensions.

Is Social Security Part of the Social Safety Net?

Building on the existing literature that examines the extent of redistribution in the Social Security system as a whole, this paper focuses more specifically on how Social Security affects the This question is important because a Social Security program that reduces overall inequality by redistributing from high income individuals to middle income individuals may do nothing to help the poor; conversely, a program that redistributes to the poor may nonetheless be regressive according to broader measures if it also redistributes from middle to upper income households. We have four major findings. First, as we expand the definition of income to use more comprehensive measures of well-being, we find that Social Security becomes less progressive. Indeed, when we use an endowment defined by potential labor earnings at the household level, rather than actual earnings at the individual level, we find that Social Security has virtually no effect on overall inequality. Second, we find that this result is driven largely by the lack of redistribution across the middle and upper part of the income distribution, so it masks some small positive net transfers to those at the bottom of the lifetime income distribution. Third, in cases where redistribution does occur, we find it is not efficiently targeted: many high income households receive positive net transfers, while many low income households pay net taxes. Finally, the redistributive effects of Social Security change over time, and these changes depend on the income concept used to classify someone as poor.

2Is Social Security Part of the Social Safety Net?

Executive Summary Building on the existing literature that examines the extent of redistribution in the Social Security system as a whole, this paper focuses more specifically on how Social Security affects the poor. This question is important because a social security program that reduces overall inequality by redistributing from high‐income individuals to middle‐income individuals may do nothing to help the poor; conversely, a program that redistributes to the poor may nonetheless be regressive according to broader measures if it also redistributes from middle‐ to upper‐income households. We have four major findings. First, as we expand the definition of income to use more comprehensive measures of well‐being, we find that Social Security becomes less progressive. Indeed, when we use an “endowment” defined by potential labor earnings at the household level rather than actual earnings at the individual level, we find that Social Security has virtually no effect on overall inequality. Second, we find that this result is driven largely by the lack of redistribution across the middle and upper parts of the income distribution, so it masks some small positive net transfers to those at the bottom of the lifetime income distribution. Third, in cases in which redistribution does occur, we find that it is not efficiently targeted: many high‐income households receive positive net transfers, whereas many low‐income households pay net taxes. Finally, the redistributive effects of Social Security change over time, and these changes depend on the income concept used to classify someone as “poor.”

Social Insurance Based on Personal Savings Accounts: A Possible Reform Strategy for Overburdened Welfare States

In spite of some cutbacks in entitlements, many welfare states' spending has continuously increased over the past decades, leading to larger tax burdens and often higher marginal tax rates. Proposals for reform often focus on reduced social insurance benefits and more actuarial insurance premia. In this paper it is shown that such reforms may have a smaller potential for reducing the marginal tax rate than commonly assumed, unless they are combined with mandatory personal savings accounts. Social insurance based on personal savings account is compared to other systems in a simple theoretical model and in a simulation within the context of Swedish social insurance. The simulation indicates that marginal tax effects can be reduced significantly by social insurance based on savings accounts without affecting life-time income distribution much.

Lifetime income distribution: households versus individuals

Equivalent lifetime income is more equally distributed than individual (non-equivalent) lifetime income. The assumption that lifetime income inequality is smaller than the annual income inequality is confirmed by our results. However, the difference between both appears to be rather small, in particular with respect to the older generations.

Health Policy and the Distribution of Lifetime Income

A number of health policies have implications for, and in turn can be influenced by, the distribution of income. However, current discussions define the distribution in current, not lifetime, income. This study describes a method of estimating gender and race differences in the distribution of lifetime incomes that account for mortality differences. When cohort lifetime incomes of living and deceased persons are compared, black men are found to be much worse off, whereas white women are found to be better off than existing estimates using annual income suggest. The mortality and lifetime income advantage of white women, however, is offset if, as some argue, white women have higher morbidity rates than white men of the same age. The authors use the concept of lifetime income to draw implications for health policy debates on cigarette and beer taxes, occupational safety and health, Medicaid versus Medicare spending, educational health promotion programs, and general investments in education.

The Impact of the Budget on Lifetime Income: A Survey

The problems involved in trying to measure the effect of the budget on the distribution of lifetime income are reviewed. A comparison is made of the likely differences between the stylised facts of annual incidence studies and the possible lifetime impact of the budget. Annual studies show that redistribution to the poor occurs, primarily as a result of pensions. It is likely that the lifetime incidence of the budget is broadly neutral since pensions will not accrue mainly to the lowest deciles when a lifetime income perspective is taken.

The redistributive impact of the general old age pensions act on lifetime income in the Netherlands

By means of a simple simulation model we will look at the effect of the General Old Age Pensions Act on the distribution of lifetime income in the Netherlands. In spite of the fact that premiums are proportional to income, whereas benefits are only dependent on marital status (married or unmarried), 1 , the redistribution of income is rather limited. This is especially true for the vertical income redistribution within a generation. This is caused by differences in mortality rates and differences in the duration of working life between income groups.

Educational Distribution and Income Redistribution through Education in Japan

This paper investigates the variables that determine the distribution of education and the redistribution of income through public education. It also explores interactions between quantity, quality, and enrollment distributions in the public and private sectors. It presents empirical evidence from Japan, which has opted for limited government spending on secondary and university education, a high-quality, low-quantity public system and, therefore, only moderate redistribution through education. It calculates enrollment and tax shares by lifetime income distribution within cohorts, to eliminate life-cycle effects on current earnings. Finally, it compares previous findings for several state systems in the U.S.

A COMPARISON OF DISTRIBUTIONS OF ANNUAL AND LIFETIME INCOME: SWEDEN AROUND 1970.

The concern with income distribution has always mainly existed because of a concern with individuals' economic welfare. In recent years, the question has arisen whether the distribution of annual income—the distribution most often studied—is the best proxy for the distribution of economic welfare. Other measures, such as lifetime income, have been proposed instead.The paper starts with a discussion of how to define and measure the distribution of lifetime income. By using a simulation model, which partly consists of estimated functions and partly of tax functions taken directly from tax laws, distributions of lifetime income, variously defined, are then constructed. These distributions are compared with each other, and with distributions of annual income. The simulations indicate that the distribution of lifetime income is considerably less unequal than the distribution of annual income. Whether inheritances are included or not seems to be of no importance for the inequality of lifetime income. If, on the other hand, we include the value of leisure time in lifetime income, inequality increases by about 10–15 percent. Distributions of income after tax have Gini coefficients which are approximately 25 percent less than the Ginis for the before‐tax distributions. We thus find that the picture of inequality we get is very much dependent on which income concept we use.

HOW MISLEADING ARE INCOME DISTRIBUTIONS?

Starting from the proposition that economic welfare is better measured by the capitalized value of expected future income at age 18 than by income at a point of time, the present paper explores the bias introduced in comparison of earnings and income distributions.The earning distribution chosen for study is that for males in 1959 in the United States. It is shown that earnings distributions are biased and therfore can be considered highly misleading in most comparisons unless the comparison involves two groups with identical age distributions and identical distributions of earnings over the working life of earners.Further, a most striking effect can be discerned in comparing the earnings to the present value distributions by educational level. As one moves up the educational ladder, the within‐group distribution of lifetime income becomes more and more equal, in sharp contrast to the findings for the distribution of earnings at a point in time.The result are sufficiently interesting and striking to warrant further studies of distributions of present value of lifetime expected earnings (and income).

EXPENDITURE-TAX INCIDENCE STUDIES, PUBLIC HIGHER EDUCATION, AND EQUITY

Expenditure-tax incidence studies have been unsuccessful in determining whether public higher education promotes more or less inequality , primarily because of their inability to assess the system's impact on the distribution of lifetime income. This paper suggests that the difficulty may be overcome by applying Becker's analytical framework for explaining income distribution to the structuring and interpreting of expendituretax incidence studies. A study of the St. Louis-St. Louis County Junior College District is presented which indicates the system does not have an equalizing effect on educational opportunity and the distribution of lifetime income. Y'he decade of the 60 's witnessed an increasing willingness among political decision makers to utilize the public budget not only as a stabilization tool but also as a means of promoting less inequality among people of various economic backgrounds. Research effort was directed to the empirical analysis of the distributional impact of the public budget. A prime result of this effort is Hansen and Weisbrod's (H & W) book on the direct benefits and costs of California public higher education in which they assess that system's impact on the distribution of current family income.1 Their basic finding is that University (U) students receive the largest average subsidy (expenditure minus ♦Assistant Professor of Economics, Wayne State University. Part of this paper is from my dissertation, completed at Washington University under the direction of John Legier, Ted Bergstrom, and Murray Weidenbaum. I am also indebted to Masanori Hashimoto and an anonymous referee for comments which have significantly improved the paper. family tax payment) and have the highest median family income, while Junior College (JC) students receive the smallest average subsidy and have the lowest median family income. State College (SC) students are in t e middle. Various individuals have commented critically on these results, emphasizing possible deficiencies in the computational procedures and the policy implications of the empirical work.2 The discussants generally agree, however, that this type of expendituretax incidence study is not suitable for determining whether public higher education is promoting more or less inequality among people of various economic backgrounds. The Musgrave budget system indicates that using public higher education transfers of income-in-kind as a means of redistributing current family income is less efficient than using direct transfers of money.3 Thus, utilizing public higher education as a redistributive tool must rest on the premise that it is more efficient than a system of direct transfers at redistributing the future or lifetime income of students. The success of public higher education at promoting more or less inequality must therefore be based on its impact on the distribution of future or lifetime income.

On the Estimation of Lifetime Income

Abstract Lifetime income, say Vs, may be defined as Vs = ΣT t=sctyt where yt is income (earnings) at age t, ct is some discount rate and s is the age an individual enters the labor force. Obviously, yt i.e., the income path over the individual's span of active life, plays a crucial part in the calculation of Vs. Mostly graphical methods have been employed for estimating the income age profile. This article presents a statistical framework for estimating lifetime income. Moreover, the first and second moments of the distribution of lifetime income are derived, and these results are applied to Dutch income data.

On the Estimation of Lifetime Income

Abstract Lifetime income, say Vs, may be defined as Vs = ΣT t=sctyt where yt is income (earnings) at age t, ct is some discount rate and s is the age an individual enters the labor force. Obviously, yt i.e., the income path over the individual's span of active life, plays a crucial part in the calculation of Vs. Mostly graphical methods have been employed for estimating the income age profile. This article presents a statistical framework for estimating lifetime income. Moreover, the first and second moments of the distribution of lifetime income are derived, and these results are applied to Dutch income data.

ON THE POSSIBILITY OF MEASURING THE DISTRIBUTION OF PERSONAL INCOME

The income distribution statistics which are based on income for a single year show a far larger inequality of income than actually exists. The distribution of annual incomes differs from the distribution of lifetime income partly because of short run fluctuations because of such things as sickness, unemployment, and unusual gains, and partly because different individuals are at different points in their life cycles. The vertical distribution of income can be considered to be the distribution of lifetime income. The horizontal distribution can be considered to be the differences arising in the current period due to short run fluctuations and differences in the age‐income cycle of persons. The observed annual income distribution statistics are a mixture of the vertical and horizontal distributions. The estimation of the lifetime income distribution implies discounting, and also raises questions as to the treatment of transfers, subsidies, public investments and taxes. However, statistics based upon a mixture of the horizontal and vertical distributions of income are of no interest.