Social Security Reform with Heterogeneous Mortality

Using a heterogeneous-agent, life-cycle model of Social Security claiming, labor
supply and saving, we consider the implications of lifespan inequality for Social
Security reform. Quantitative experiments show that welfare is maximized when
baseline benefits are independent of lifetime earnings, the payroll tax cap is kept
roughly unchanged, and claiming adjustments are reduced. Eliminating the earnings
test and the income taxation of Social Security benefits provides additional gains.
The Social Security system that would maximize welfare in a “2050 demographics”
scenario, characterized by longer lifespans and an increased education-mortality
gradient, is similar to the one that would maximize welfare today.