How Effective is Redistribution Under the Social Security Benefit Formula?

This paper uses earnings histories obtained from the Social Security Administration and linked to the survey responses for participants in the Health and Retirement Study to investigate redistribution under the current social security benefit formula. When individuals are arrayed by indexed lifetime earnings, benefits are significantly redistributed from those with high lifetime earnings to those with low lifetime earnings. However, much of this apparent redistribution is from men to women, and when examined at the level of the family, from primary to secondary earners. When families are arrayed according the total lifetime earnings, and spouse and survivor benefits are taken into account, the extent of redistribution from families with high lifetime earnings to families with low lifetime earnings is roughly halved. When families are arrayed by their earnings potential, i.e., earnings during years when both spouses are engaged in substantial work, there is very little redistribution from families with high to low earnings capacity. Accordingly, at least for families on the verge of retirement day, introducing a system that ignored issues of redistribution would have no major effect on the distribution of social security benefits net of taxes among families with different earnings capacities.

Personal Income and Wealth Distribution/Social Security and Public Pensions/Economics of the Elderly/Retirement/Retirement Policies/Social Security/Income Redistribution/Retirement

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