Working Paper: NBER ID: w20671
Authors: Matthew Weinzierl
Abstract: The price indexation of Social Security benefit payments has emerged in recent years as a flashpoint of debate in the United States. I characterize the direct effects that changes in that price index would have on retirees who differ in their initial wealth at retirement and mortality rates after retirement. I propose a simple but flexible theoretical framework that converts benefits reform first into changes to retirees' consumption paths and then into a net effect on social welfare. I calibrate that framework using recently-produced data on Social Security beneficiaries by lifetime income decile and both existing and new survey evidence on the normative priorities Americans have for Social Security. The results suggest that the value retirees place on protection against longevity risk is an important caveat to the widespread enthusiasm for a switch to a slower-growing price index such as the chained CPI-U.
Keywords: Social Security; Benefits Indexing; Retirement; Welfare Economics
JEL Codes: E31; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changing the price indexation of social security benefits (H55) | retirees’ consumption paths (J26) |
| Changing the price indexation of social security benefits (H55) | social welfare (I38) |
| A faster-growing price index (C43) | welfare gains for wealthier retirees (H55) |
| A faster-growing price index (C43) | welfare losses for poorer retirees (J26) |
| The majority of retirees prefer a backloaded benefits path (J26) | better protection against longevity risk (G52) |
| The poorest retirees may prefer frontloaded benefits (J26) | shorter life expectancy (I14) |
| A switch to a slower-growing index (C43) | net welfare losses (D69) |
| President Obama's proposed reform (E69) | net welfare gains across different retiree demographics (J26) |