Socioeconomic Differentials in the Returns to Social Security

by Constantijn (Stan) Panis, Lee A. Lillard

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Returns to Social Security's Old Age and Survivors Insurance (OASI) program vary across socioeconomic groups because of progressivity in the benefit formula, spousal and widowhood provisions, differential mortality rates, and other factors. This paper computes the rate of return to OASI contributions and the implied intracohort transfers, distinguishing between a number of socioeconomic characteristics: males and females; blacks and whites; single persons and married couples (with several force participation scenarios); and low, medium, and high incomes. Accounting for the fact that mortality rates differ not only by age, sex, and race, but also by marital status and household income, the authors find that income transfers from blacks to whites and from high-income to low-income individuals are smaller than Vital Statistics mortality rates predict. The authors also assess the effects of raising the Normal Retirement Age, increasing the contribution rate, and reducing benefits on differentials in returns to OASI, and the authors illustrate the potential impacts of reform amendments on various income categories and the 1930-1970 birth cohorts.

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