Old-Age And Survivors Insurance Research Articles

The effects of changes in social security’s delayed retirement credit: Evidence from administrative data

The delayed retirement credit (DRC) increases monthly OASI (Old Age and Survivors Insurance) retired worker benefits for primary beneficiaries who claim after their full retirement age (FRA). For many years, the DRC was set at 3.0 percent per year (0.25 percent monthly). The 1983 amendments to Social Security more than doubled this actuarial adjustment to 8.0 percent per year, with the changes phased in gradually over time. In this paper, we use administrative data from the Social Security Administration (SSA) to estimate the effect of this policy change on individual claiming behavior and labor supply. We focus on the first half of the DRC increase (from 3.0 to 5.5 percent) given changes in other SSA policies that coincided with the later increases. Our findings demonstrate that the increase in the DRC led to an increase in delayed claiming of Social Security benefits among men and strongly suggest that the effects were larger for those with higher lifetime incomes, who would have a greater financial incentive to delay given their longer life expectancies. Furthermore, liquidity constraints play an important role in responsiveness to DRC increases. We do not find evidence of changes to the claiming behavior of women or to labor supply for either men or women.

MACROECONOMIC EFFECTS OF REDUCING OASI BENEFITS

In this paper, we evaluate the effects of a reduction in Social Security’s Old-Age and Survivors Insurance (OASI) benefits using seven different quantitative general equilibrium overlapping-generat...

Fixing Social Security: Major Reform or Minor Repairs?

Without congressional action, the Social Security reserve fund will be exhausted by 2035. When that occurs, benefit payments must be cut by one-fifth. To avoid that outcome, Congress must agree on a reform plan that boosts revenues, cuts pensions, or does both. The choice of a reform strategy should depend on voters’ support for the goals of the Old-Age, Survivors, and Disability Insurance (OASDI) program and evidence about the program’s effectiveness in achieving those goals. This article explains the aims of the Old-Age and Survivors Insurance (OASI) program, briefly describes how the program attempts to achieve those aims, and considers evidence on whether the goals have been achieved and at what cost. It then considers alternative reforms that address OASI’s main problem, namely, the long-term shortfall in program revenues compared with pension commitments. It concludes by identifying the reforms that seem best suited to achieving OASI’s core aims while conforming to voter preferences.

The Postretirement Well-Being of Workers With Disabilities

Older workers who develop significant limitations in health or functioning face declines in income and consumption and an increased likelihood of poverty in the years prior to retirement. We assess the extent to which those differences persist after reaching retirement age. We use the Health and Retirement Study (HRS) linked to Social Security Administration (SSA) records to compare the postretirement financial well-being of workers who experienced disability onset during their working years with those who did not, based on their claiming behavior for Social Security disability and retirement benefits. We find that even after full retirement age, gaps that emerged prior to retirement persist; those who experienced disability prior to retirement had lower incomes, were more likely to be in poverty, and had significantly lower wealth. Workers with disabilities who claimed Social Security Disability Insurance (DI) fared better than those who were rejected for such benefits, yet both groups were worse off than those who delayed claiming benefits until they were eligible for Social Security Old Age and Survivors Insurance (OASI) benefits. Our findings indicate that any changes to the Social Security benefit structure must be mindful of the short- and longer term implications for already-vulnerable groups of workers.

Saving Social Security Disability Insurance: Designing and Testing Reforms Through Demonstration Projects

The Bipartisan Budget Act of 2015 partially addressed the poor state of the Social Security Disability Insurance (SSDI) Trust Fund, over the short run and the medium run. At the time of the act, the fund was roughly one year from depletion. Over the short run, Congress reallocated some portion of the payroll tax funds from the Old-Age and Survivors Insurance (OASI) Trust Fund to the Disability Insurance (DI) Trust Fund to allow the continued payment of full benefits under the current system through fiscal year 2022. According to the most recent report (2017) of the Social Security Board of Trustees, the DI Trust Fund will be depleted in 2028. Looking toward the longer run, Congress took the opportunity to provide a mandate and resources for program redesign. Sections 821–23 of the Bipartisan Budget Act granted expanded authority for the Social Security Administration to engage in demonstration projects aimed at improving the opportunity for disability beneficiaries to remain attached to the labor force or return to work. In this working paper we build on our earlier writing, which proposes reforms to the SSDI program, and consider demonstration project designs that promote the testing of salient aspects of our proposals. We emphasize both a modular design for demonstration projects and the sequence of projects as important for designing effective demonstrations that speak to both administrative and congressional needs for information in the 2018–2028 time frame. We also consider other critical tenets that project designers should consider before fielding projects in the very near future.

Using Kinked Budget Sets to Estimate Extensive Margin Responses: Method and Evidence from the Social Security Earnings Test

We develop a method for estimating the effect of a kinked budget set on workers' employment decisions, and we use it to estimate the impact of the Social Security Old-Age and Survivors Insurance (OASI) Annual Earnings Test (AET). The AET reduces OASI claimants' current OASI benefits in proportion to their earnings in excess of an exempt amount. Using a Regression Kink Design and Social Security Administration data, we document that the discontinuous change in the benefit reduction rate at the exempt amount causes a corresponding change in the employment rate. We develop conditions in a general setting under which we can use such patterns to estimate the elasticity of the employment rate with respect to the effective average net-of-tax rate. Our resulting elasticity point estimate for the AET is at least 0.49, suggesting that the AET reduces employment by more than one percentage point in the group we study.

Social Security Old-Age Benefits in Four OECDCountries: Policy Lessons for the United States

This article surveys reforms of social security programs in four countries whose experiences may be relevant for the United States when it considers what changes to make to help ensure future solvency and to address other issues concerning the provision of benefits through the Social Security Old-Age and Survivors Insurance (OASI) program. It discusses reforms to social security programs in Canada, Germany, Sweden, and the United Kingdom. The article focuses on reforms that may provide useful examples for U.S. policymakers.

How Does the Personal Income Tax Affect the Progressivity of OASI Benefits?

This study calculates the impact of federal income taxes on the progressiveness of the Old Age and Survivors Insurance (OASI) program. It uses the Health and Retirement Study (HRS) data linked with the Social Security Earnings Records to estimate OASI contributions and benefits for individuals and households, before and after income taxes, for three birth cohorts. It uses two measures of progressivity: redistribution by decile (the difference between the share of total benefits received and the share of total taxes paid) and “effective progression” (the change in the Gini coefficient). Under both measures, the results without the income tax confirm previous findings: Social Security is progressive on an individual basis, but that progressivity is dramatically cut when one calculates it on a household basis. Adding income taxes could make the program either more or less progressive. On the one hand, the tax treatment of contributions makes the system even less progressive than generally reported. On the other hand, the taxation of benefits makes it more progressive. The net result is that adding the personal income tax to the analysis makes Social Security more progressive than without taxes, on both the individual and household bases. Importantly, however, the impact of taxation on redistribution increases significantly among younger cohorts. Under current law, the Social Security system becomes more progressive over time.

Cohort-Specific Measures of Lifetime Social Security Taxes and Benefits

This paper develops estimates of lifetime money's worth and redistributional outcomes under the Old Age and Survivors Insurance (OASI) program for all past, present, and future birth cohorts affected by the program through the cohort born in 2100. The estimates presented in this study incorporate a comprehensive accounting of all OASI taxes and benefits and blend historical administrative data with tax and benefit projections. Projected taxes and benefits are consistent with the detailed intermediate economic and demographic assumptions underlying the 2002 Trustees Report and extended beyond the Trustees Report projection period using an approach consistent with the Trustees Report assumptions. The qualitative conclusions reached in this analysis should be unaffected by the relatively minor changes in key economic and demographic assumptions that characterize subsequent Trustees Reports. Because the present OASI program is projected to be in long-run deficit, estimates are also developed in this paper under two stylized alternative policies that bring the program into long-run financial balance over the Trustees Report projection period and beyond. The first alternative policy achieves long-run financial balance through a series of proportional benefit award adjustments and the second alternative policy through a series of payroll tax rate adjustments. Lifetime outcomes for each birth cohort are examined both from the perspective of cohort members, indicating the extent to which each cohort has received or can expect to receive their money's worth from the program, and from the perspective of the program, indicating the extent of redistribution across the cohorts. These estimates update similar estimates presented in Leimer (1994) and, under certain assumptions, can be used to calculate the legacy debt associated with program transfers to early cohorts. This paper - describes the methods used in this analysis to develop program and cohort outcomes under the alternative policies, - describes and analyzes these program and cohort outcomes, - compares these outcomes with analogous outcomes in the most comparable previous analyses and identifies key differences in assumptions and approaches underlying the different outcomes, and - presents some concluding observations.

Resource Disparities in Treating Persons With Disabilities for Four Common Cancers

This study explored whether cumulative Medicare outlays on breast, colorectal, lung, and prostate cancer treatment differ between persons with versus without disabilities. The authors used linked Surveillance, Epidemiology and End Results—Medicare data to compute reimbursements between cancer cases originally entitled to Medicare because of Social Security Disability Insurance (SSDI) and those receiving Old Age and Survivors Insurance (OASI) benefits. They examined differential outlays between these two subgroups by Medicare Part A and Part B services and by treatment phase to gauge whether disability-related resource disparities occur. The findings are mixed, with persons with disabilities treated for lung cancer most likely to experience such disparities. The SSDI subgroup had lower Part B outlays in all four cancers, but some of these were canceled out by higher Part A reimbursements.

Social Security Outcomes by Racial and Education Groups

This article evaluates the Social Security outcomes for different racial and education groups. Outcomes differ across groups due to the interactions between group-specific mortality risks and lifetime earnings, the benefit formula, and the benefit package, which includes life insurance, spousal benefits, and retirement pensions. Based on either the rate of return or present value, individuals with less education fare better than those with higher educations. This holds even before accounting for preretirement survivors' benefits, which, when accounted for, reinforce this finding. Single whites do considerably better than single blacks when outcomes are compared by internal rates of return. Accounting for survivors' benefits reduces regressivity, but blacks continue to fare worse than whites. In contrast, based on present values, whites generally do worse than their respective counterparts. Social Security is primarily an intergenerational transfer system providing payments to retired workers and their families financed by payroll taxes on current workers. The Old-Age and Survivors Insurance (OASI) program also provides life insurance through survivors benefits. Because longer lives are positively related to income, the retirement pension favors workers with higher lifetime incomes, other things equal. Conversely, survivors' insurance is more likely to be awarded within groups with higher mortality rates at younger ages, which happens to be those with lower incomes. Further, the benefit formula replaces a higher percentage of the income of workers with lower lifetime earnings, while spousal retirement benefits favor couples in which only one spouse works. As a result, any particular group's outcome depends on their lifetime earnings, their group-specific longevity, the tax rates they face, and the Social Security benefit formula. There have been quite a few studies devoted to calculating the internal rate of return and net present value of Social Security.' Some consensus has been reached by those studies: early generations do better than later generations, women do better than men, and married couples with a single earner do better than singles or working couples. These results are not surprising given that a pay-as-you-go system usually generates a higher return in its start-up phase than in the mature phase, that women live longer than men, and that nonworking spouses receive benefits without making tax payments. However, to date, a consensus has not been reached on some of the more interesting but less obvious issues such as how different income classes or different races fare in the system. This article

US Social Security Under Low Fertility

Focusing on existing social security programs in the US this article discusses ways to minimize their negative societal impacts and to cope with emerging below replacement fertility. Inasmuch as the very survival of social security systems depends on the levels of reproduction this article considers probable adjustments of social security under conditions of below-replacement fertility. Social security systems create distortions in the labor supply and savings rate that reduce the potential size of a countrys gross national product. Faced with this plus other taxes on income to support various government programs the worker perceives his diminished discretionary after-tax income as inadequate to support a family; hence more wives enter the labor force resulting in even lower birth rates. As the retirement age and birth rate fall there are fewer workers to support older nonworkers. As a result taxes are usually increased. Benefit growth is rarely restrained. Currently over 20% of the US budget pays for social security benefits. The US Old-Age and Survivors Insurance (OASI) can provide 1 to several benefits per worker taxed. The social security systems actuaries in making their 75-year demographic projections may be underestimating future life expectancy and overestimating the future total fertility rate of women in the US. If their demographic assumptions are wrong either the taxes will have to be increasd further or the level of benefits constrained or both. The sensitivity of the social security system to overestimates of the fertility rate is even greater than to underestimates of longevity at old ages. Immigration may partially offset the low birth rates of US natives. Despite the way it favors nonworking and divorced women the US social security system has not offset the secular trend of increasing female employment. The US government must now decide 1) whether to attempt to influence the birth rate by changing the economic balance between the rewards for having and not having a child and 2) whether to reduce the current transfer of income from young to old.

Social Security, Liquidity Constraints, and Pre-Retirement Consumption

One of the primary goals of the social security retirement program is the maintenance of consumption in old age. In the past decade, since the pioneering paper by Feldstein [13], studies have examined the impact of the system on consumption over the entire life cycle and not just in old age. Empirical work has tested the impact on consumption of the individual wealth transfers accompanying the introduction of a pay-as-you-go social security system.' Extending this discussion of the impact of social security on pre-retirement consumption, Hubbard [21] has shown in the context of lifetime uncertainty that even an actuarially fair, fully funded social security system can raise lifetime consumption. Hence, previous partial equilibrium estimates of the impact of social security on consumption drawn solely from consideration of the intergenerational wealth transfer at the introduction of the system are underestimates of the potential effect.2 An important assumption in the approaches cited above is that of perfect capital markets, i.e., that individuals can borrow against prospective gains from participating in the social security system. Such an assumption is at variance with actual limitations on borrowing (e.g., upward sloping interest rate schedules, collateral requirements, and quantity restrictions). Hayashi [18] found that approximately twenty percent of all consumption in the U. S. is accounted for by liquidity-constrained consumers.3 Flavin [16] found that the estimate of the marginal propensity to consume is affected dramatically by the inclusion of proxies for liquidity constraints, suggesting that liquidity constraints are an important part of the observed excess sensitivity of consumption to current income. Since its inception in 1935, Old Age and Survivors Insurance (OASI) provided

Perceived Longevity and Early Retirement

A merican workers have been retiring from I L their jobs and receiving Social Security retirement benefits at younger and younger ages in recent decades.' Motivated by concern over this trend, studies of the retirement decision have followed two distinct lines: some have found poor reported health to be associated with earlier retirement, while others have analyzed the effects of retirement program parameters on life-cycle employment plans.2 There is, however, a connection between these causal factors which is not widely recognized: under the Social Security system, the financial attractiveness of early, actuariallyreduced benefits can be shown to be directly related to the remaining length of time that one expects to live. This is the hypothesis that I propose in this paper. The Social Security system, at its inception, provided retirement benefits only to insured workers who had attained age 65. More recently (since 1956 for women and since 1961 for men), however, reduced benefits have been available beginning at age 62. The reduction is applied to all future benefits, is scaled according to the number of months before age 65 that benefits are first received, and is roughly fair: the reduction is calculated to provide roughly the same present discounted value of lifetime benefits, regardless of the age at which benefits are first taken.3 Superficially, then, the early retirement option appears to be formulated in such a way as to minimize behavioral distortions by providing no financial advantage, relative to taking benefits at 65. Actuarial fairness also makes the option seem costless to the Social Security trust funds. In fact, however, the actuarial reduction equates expected present values of early and normal retirement benefit streams only for those with typical life expectancy. Prospective retirees with atypically low survival probabilities can maximize the expected present value of their benefits by choosing early benefit entitlement,4 while those with high probability of survival wan receive greater lifetime benefits through age 65 entitlement. Adverse selection can thereby increase the average expected present value of benefits for the population as a whole. The paper begins by demonstrating that early entitlement provides the greatest discounted lifetime benefit stream if and only if one dies before a specific borderline age. It is then straightforward to incorporate this actuarial insight into a more conventional analysis of the labor-leisure choice made by 62-year-olds. I then test the hypothesis that age at entitlement is positively related to longevity by using Social Security's Continuous Work History Sample (CWHS). The empirical approach is to measure how well entitlement decisions predict mortality. By taking this approach, I am able to obtain an estimated equation with which age at entitlement can be used to predict actual mortality. Thus, mortality rates can be generated for those claiming benefits at different ages, and by using these it is possible to estimate the gains to beneficiaries (and cost to the Social Security system) due to adverse selection. Received for publication May 3, 1982. Revision accepted for publication January 31, 1983. * Michigan State University. I would like to thank Joseph Applebaum, Paul Cullinan, Robert Dalrymple, Daniel Hamermesh, Kathy Ruffing, Frank Sammartino, and two anonymous referees for advice and comments on earlier drafts. I have also benefited from ideas expressed by Francisco Bayo and Steven Goss of the Office of the Actuary of the Social Security Administration. All errors and omissions are my own, however. Anne Rader provided extremely able research assistance. l Between 1971 and 1976 the proportion of retired workers' benefits awarded to 62-year-olds rose from 29% to 37%. See Social Security Administration (1971-76). In this paper the Old Age and Survivors Insurance (OASI) program will be referred to as the Social Security Retirement Program. 2 Boskin (1977) has highlighted this dichotomy in the literature. 3Monthly benefit amounts are reduced by 5/9% for each month before age 65 that they are taken. Thus, a monthly benefit claimed at age 62 is equal to 80% of the benefit available to the same worker at age 65 (if potential benefits are unchanged by any further covered earnings between ages 62 and 65). An increase of much lesser magnitude (1/4%) is applied to the benefits of those who delay their claims beyond age 65. This increase is far less than actuarially fair. 4 Entitlement denotes the receipt of benefits. Initial entitlement need not be coincident with retirement, except in the sense that entitlement requires that a beneficiary be earning little enough that the earnings test does not reduce benefits to zero.

A Critique of the Old-Age and Survivors Insurance Program of the United States

The Old-Age and Survivors Insurance (OASI) program is the most important source of retirement income for the aged and is one of the major institutional developments of the past third of a century. At the end of fiscal year 1970, almost 17 million Americans were receiving retirement benefits and another 6.4 million were receiving survivors benefits under the program with cash benefits to these beneficiaries amounting to $26.3 billion during fiscal year 1970.1 Virtually all Amer? icans are covered by social security and, therefore, will be entitled to some benefits under the program. It is the purpose of this paper to analyze the economic and social impact of the retirement benefits provided by the OASI program. While the Social Security system also encompasses disability and health insur? ance for the aged, only the retirement and survivors programs will be examined. OASI has dual objectives. One objective is to provide a minimum level of income or a of to prevent destitution in old age. This assumes that the OASI benefit will be supplemented by personal assets and private pensions. The other objective of the program is to provide a level of benefits for a retired couple which would replace . . at least 50 percent of his average wages under the social security system.2 Since the wife's benefit is equal to one half of her husband's benefit or primary insurance amount, the replacement goal for an un? attached retiree would be one-third of his average covered earnings. The social security benefit is the foundation upon which the contem? porary American program of income maintenance for the aged has been built. The OASI benefit forms the base of the tripartite system of income maintenance which consists of social security, private pensions and per? sonal assets. Since its inception, it has been generally assumed that the OASI program should provide the floor of protection or income base to be supplemented by personal assets and private pensions. Although this assumption is widely accepted and has often been stated by Congress, the reality of the tripartite system is questionable. However, the continued 39

Trust Funds and National Output

A new look at the effects of trust fund movements on the level and composition of national output seems long overdue. Trust funds, especially those associated with pension and welfare programs, are becoming increasingly significant in the economy. But the mere bulk of trust funds today is not the only reason why a new analysis is needed. Another reason is that when thinking about the effects of trust fund movements our minds seem prone to run along the narrow groove cut by Keynesian under-employment equilibrium theory, a theory fit for a special situation, but certainly not for all times, and perhaps not at all for the years ahead. Once in the Keynesian groove, we are led to conclude that trust fund accumulation reduces national output but does not affect capital formation.' And still further, that any attempt by society to save more of a given income is doomed to miserable failure, a corollary of which is that one generation cannot by saving provide for its own future retirement needs. In this paper we shall try to make clear when Keynesian results can be expected, but also under what conditions other, and far different, results obtain. Though the analysis is quite general, it is most relevant to the accumulation of funds for retirement programs. As a concrete example, also most relevant to public policy, we take the Federal old-age and survivors insurance (OASI) program. But the analysis, and the technique of numerical estimation, will apply to all trust fund movements. Though focused on the effects of fund accumulation, the analysis is perfectly reversible for the effects of trust fund reductions.

The Effect of Private Pension Plans on Personal Savings

THE recent focusing of union demands on noncontributory pension plans raises the question of the possible effects of this newest development in the field of collective bargaining on personal savings. Does the accumulation of huge pension reserves represent merely a rechanneling of savings or does it represent a net addition to the savings stream? The whole magnitude of the problem of the accumulation of private pension reserves can be sized up in making the following rough calculations: The current cost of most pension plans is estimated at around 5 per cent of the payroll. Under the unlikely hypothesis that pension plans of similar scope will ultimately spread through the entire non-agricultural private segment of the economy, their aggregate annual cost (before provision for accumulating reserves for past service pension credits) would amount to about 3 per cent of Gross National Product, while for a number of years benefit payments would remain relatively small. This is clearly an extreme assumption. If, however, the scope of the Federal Old-Age and Survivors Insurance (OASI) Program is broadened in accordance with HR-6ooo, and private pension plans continue to spread, a few years from now funds channeled into both types of penson reserves (plus investment income on such reserves) may very well run at the rate of 2 per cent of GNP. On the other hand, over the long pull, net domestic capital formation (including residential housing) is likely to average less than io per cent of GNP per annum.1 Thus, annual accumulations of pension reserves alone may amount to about one fourth of the average domestic capital formation. A considerable proportion of corporate needs for long-term funds is currently met from internal sources and does not involve any debt instruments. Unless the demand for external financing increases, reserve accumulations in (private and public) pension funds are likely to be equal to considerably more than one fourth of the amount of available investment securities and mortgages. Obviously, the total effect of pension plans on aggregate savings will depend (i) on the effect of the financial cost of these plans on the price level, (2) on the incidence of this cost on particular groups of income receivers whose money income and ability to save may be reduced, (3) on the degree to which dissaving will be reduced, and (4) on the ability and willingness of workers covered by such plans to save more or less than otherwise. The ability of all income receivers to save will depend on the way in which the cost of pension plans will be borne by the economy. To the extent that it will be passed on in increased prices, it will reduce the real income of all consumers (not just of the potential beneficiaries of the pension plans); to the extent that it will reduce dividend disbursements, it will change the income distribution and reduce the ability to save of a large segment of recipients of property income. Moreover, increased security is likely to affect the covered workers' willingness to save. (i) Since old-age pension plans involve postponement of the payment of a part of labor income until retirement age, current consumption of wage earners must be lower than if equivalent increases were granted in current wages. Suppose that, productivity remaining unchanged,2 organized labor is successful in obtaining the N-th round of wage increases. The price level will rise, some redistribution of income will take place, but consumption in real terms is likely 1 The average rate of net domestic capital formation, derived from Kuznets' estimates for I869-i9i8, is IO.9 per cent of GNP. It declined to 8.5 during the prosperous twenties (I9I9-28) and dropped sharply to i.5 per cent during the thirties (I929-38). The postwar (I946-49) average was I4.6 per cent. 2 This assumption is made for illustrative purposes only. The same argument could be developed under a number of alternative assumptions.