SOCIAL SECURITY: A FINANCIAL APPRAISAL ACROSS AND WITHIN GENERATIONS

Abstract

This paper computes the expected present value of Social Security retirement benefits and taxes for households of different marital circumstances, incomes, and age cohorts.Also computed are the net gain or loss from participation in the system and the expected internal rate of return it offers various participants.The paper calculates the marginal linkage between benefits and contributions, and also examines how the age of entry into the covered workforce affects the participant.All computations are made for the 1985 Social Security and income tax laws.The general results are that Social Security offers vastly different terms to households in different circumstances.The net gain or loss varies by $200,000 and the real internal rate of return on contributions ranges from negative numbers to 6.6% for households of different ages, income levels, and marital status.These differences are far greater than the widely debated distributional affects of relevant income tax alternatives.We also find that there is a great deal of variance in the marginal linkage of benefits and taxes with many households facing a situation where the present value of benefits increases from 0 to 30 cents per extra dollar of taxes paid.

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