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

Peterman, William B.; Sommer, Kamila

doi:10.17016/FEDS.2015.092r1

Working Paper

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

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: Social Security; Recessions; Great Depression; Overlapping Generations;

JEL Classification: D91; E21; H55;

https://doi.org/10.17016/FEDS.2015.092r1