Social Security reform: three Rawlsian options
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Social Security reform: three Rawlsian options Erin Cottle Hunt1 · Frank N. Caliendo2
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract To maintain long-run solvency in light of changing demographics, the US Social Security system needs to be reformed. We present three reform options that protect the retirement benefits of the economically vulnerable while also balancing the Social Security budget. We refer to these three options as Rawlsian reforms because, with each reform option, the Social Security benefits of those at the low end of the income distribution are left intact. Two of our reforms break the link between the benefit cap and the tax cap by lowering the benefit cap. We explore the effect of each reform on ex-ante expected utility, the distribution of private savings, and the distribution of lifetime income in a life-cycle model. Keywords Social Security reform · Inequality · Rawlsian welfare JEL Classification H3 · E6
1 Introduction Social Security in the USA (and in many OECD countries) is an unfunded, or payas-you-go system. The financing of benefits in an unfunded system depends critically on the ratio of workers to retirees, and this ratio is predicted to decline dramatically in many countries. For example, in the USA during the period 1974–2008 the ratio of workers to retirees was stable between 3.4 and 3.2. The ratio has declined since 2008 and is predicted to fall to 2.0 over the next few decades. The Social Security Administration (SSA) estimates that they will only be able to pay full benefits until the year 2033. To maintain long-run solvency, Social Security taxes will need to be raised, benefits will need to fall, or some combination of both. * Frank N. Caliendo [email protected] Erin Cottle Hunt [email protected] 1
Lafayette College, Easton, USA
2
Utah State University, Logan, USA
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E. Cottle Hunt, F. N. Caliendo
In addition to transferring resources across generations, Social Security also redistributes resources within a generation. Social Security benefits are paid according to a progressive formula, thus redistributing resources from high-income retirees to low-income retirees.1 Many retirees rely on Social Security benefits for a large fraction of their retirement consumption, particularly retirees who had low income during their working years. In this paper, we look for reforms that protect the benefits of low-income retirees. Our focus on retirees who earned low wages during their working life is shared by many policy makers. The Senate’s Special Committee on Aging (2010) and the Government Accountability Office (2010) both encourage Congress to take a Rawlsian perspective when evaluating Social Security reform measures. In their estimation, a desirable reform should not only balance the budget, but it should also protect benefits for the economically vulnerable.2 Many recent proposals from members of Congress have a similar theme and attempt to balance the budget (or reduce the long-run funding shortfall) whi
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