The Rise and Expansion of Social Security in the US

The size of the Social Security program as a percentage of output has increased continuously since its inception. The main expansion has been on the extensive margin (number of individuals under the program), rather than on the intensive margin (benefits per old). Most of the increase was not due---mechanically---to changes in life expectancy or the population structure: beneficiaries of the OASI program increased at 8 percent, while the population 62 and older increased at 2 percent between 1940 and 2005. Moreover, a key feature of the transition is that coverage was not universal: it only included members of commerce and industry in 1940, and was expanded to include other groups by a series of amendments through the 1970s. Additionally, the number of eligible individuals that chose to claim benefits went from about 20% in 1940 to 89% in the mid 60s. In this paper, we investigate the economic and political reasons that explain the extension of coverage of the OASI program to a larger fraction of the population as well as the incentives to become beneficiaries. We use an overlapping generation model where agents are subject to uninsurable idiosyncratic income risk. Social Security provides insurance not only across generations that face different aggregate risk over their life-cycle, but also within generations by agents who work in sectors with different income profiles and exposure to such shocks. We quantify how much of the increase in coverage was due to: (a) sector-specific risk considerations, (b) aggregate business cycle fluctuations and (c) the change in population structure. To do this, we assume that agents working in different sectors can organize and lobby for policy (whether to be covered by the program or not). We compute a general equilibrium model calibrated to the distribution of earnings observed in 1940---when the system was actually implemented---and conduct a series of experiments involving changes in the underlying economic and population structures to account for the transition in the system.