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Social Security: Progressive Benefits but Regressive Outcome?

Author

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  • Monisankar Bishnu
  • Nick L. Guo
  • Cagri S Kumru

Abstract

In this paper, we study under what conditions a Pay As You Go (PAYG) type social security program can have regressive outcomes even though the benefits of this program are designed to be progressive. Since a PAYG social security program collects payroll taxes whenever agents are working, and it pays retirement benefits as long as retirees are alive, each individual's well being depends on how long they contribute to and receive payments from this program as well as how much. Empirical evidence suggests that agents who have low income tend to start working earlier and have shorter longevity than those with middle or high income. Implications of the low income groups' shorter mortality are examined both analytically and quantitatively in this paper. We find the conditions under which a PAYG social security program may have a regressive outcome in a simple two period partial equilibrium model. Afterwards, we created a large scale quantitative OLG model calibrated to the US economy to compare aggregate and welfare implications of the US type PAYG, a no progressive PAYG, and a means tested pension program. Our results indicate that incorporating differential mortality into account change the welfare implications.

Suggested Citation

  • Monisankar Bishnu & Nick L. Guo & Cagri S Kumru, 2017. "Social Security: Progressive Benefits but Regressive Outcome?," ANU Working Papers in Economics and Econometrics 2017-656, Australian National University, College of Business and Economics, School of Economics.
    • Handle: RePEc:acb:cbeeco:2017-656
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    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp656.pdf
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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