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

William Peterman

No 790, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: This paper builds a computational life cycle model and simulates the Great Depression in order to assess the historical welfare implications of implementing Social Security during this business cycle episode. A well established result in the literature is that when comparing steady states with and without Social Security in a standard life cycle model, long-run welfare tends to be lower with Social Security. Consistent with these previous results, this paper determines that on average in the steady state the original Social Security program lowers welfare by the equivalent of 4.5% of expected lifetime consumption. Moreover, the likelihood that this Social Security program causes a decrease in an agent's welfare in the steady state is 92%. However, this paper finds that the welfare effects of implementing Social Security on agents in the economy at the time the program is adopted is very different than the long-run welfare effects. In particular these living agents experience an increase in their lifetime welfare due to the implementation of Social Security that is equivalent to 4.4% of their expected future lifetime consumption. Moreover, the paper finds that the likelihood that these living agents experience an increase in their lifetime welfare due to the adoption of the program is 83%. The divergence in the short-run and long-run welfare effects is primarily driven by a slow adoption of payroll taxes and a quicker adoption of benefit payments. This divergence could be one explanation for why a program that decreases long-run welfare was originally implemented.

Date: 2014
New Economics Papers: this item is included in nep-dge and nep-his
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Working Paper: A Historical Welfare Analysis of Social Security: Whom Did the Program Benefit? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:790

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