A Historical Welfare Analysis of Social Security: Whom Did the Program Benefit?

49 Pages Posted: 17 Oct 2015

See all articles by Kamila Sommer

Kamila Sommer

Board of Governors of the Federal Reserve System

William Peterman

The Federal Reserve Board of Governors

Date Written: December 7, 2015

Abstract

A well-established result in the literature is that Social Security tends to reduce steady state welfare in a standard life cycle model. However, less is known about the historical effects of the program on agents who were alive when the program was adopted. In a computational life cycle model that simulates the Great Depression and the enactment of Social Security, this paper quantifies the welfare effects of the program's enactment on the cohorts of agents who experienced it. In contrast to the standard steady state results, we find that the adoption of the original Social Security tended to improve these cohorts' welfare. In particular, we estimate that the original program benefited households alive at the time of the program's adoption with a likelihood of over 80 percent, and increased these agents' welfare by the equivalent of 5.9% of their expected future lifetime consumption. The welfare benefit was particularly large for poorer agents and agents who were near retirement age when the program was enacted. Through a series of counterfactual experiments we demonstrate that the difference between the steady state and transitional welfare effects is primarily driven by a slower adoption of payroll taxes and a quicker adoption of benefit payments during the program's phase-in. Overall, the opposite welfare effects experienced by agents in the steady state versus agents who experienced the program's adoption might offer one explanation for why a program that potentially reduces welfare in the steady state was originally adopted.

Keywords: Great Depression, Overlapping Generations, Recession, Social Security

JEL Classification: E21, D91, H55

Suggested Citation

Sommer, Kamila and Peterman, William, A Historical Welfare Analysis of Social Security: Whom Did the Program Benefit? (December 7, 2015). FEDS Working Paper No. 2015-092. Available at SSRN: https://ssrn.com/abstract=2674608 or http://dx.doi.org/10.2139/ssrn.2674608

Kamila Sommer (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

William Peterman

The Federal Reserve Board of Governors ( email )

Washington, DC 20551
United States

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