Social Security's Treatment of Postwar Americans

Abstract

Social security faces a major long-term funding crisis. A 38 or greater percentage increase in the system's tax rate is needed to meet benefit payments on an ongoing basis. Tax increases of this magnitude or comparable benefit cuts would significantly worsen social security's treatment of postwar Americans. This paper uses CORSIM (a dynamic micro simulation model) and SOCSIM (a detailed social security benefit calculator) to study this treatment. The study finds that Americans born in the postwar period will, under current law, lose roughly 5 cents of every dollar they earn to the OASI program in taxes net of benefits. Measured as a proportion of their lifetime labor incomes, the middle class are the biggest losers, surrendering about 7 cents per dollar earned. But measured in absolute dollars, the rich lose the most. Out of every dollar that postwar Americans contribute to the OASI system, 67 cents represent a pure tax. The system treats women better than men, whites better than non-whites, and the college-educated better than the non-college-educated. While the system has been partially effective in pooling risk across households, it offers postwar cohorts internal rates of return on their contributions that are quite low--1.86 percent. This is half the real rate currently being paid on inflation-indexed long-term U.S. government bonds. If taxes are raised or benefits cut by the amounts needed, under intermediate assumptions, to achieve intertemporal budget balance in the OASI program, postwar Americans will end up receiving a 1 percent real return on their contributions.

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