social security and trends in inequality
TRANSCRIPT
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Social Security and Trends in Inequality
Sylvain Catherine Max Miller Natasha SarinWharton Wharton PennLaw & Wharton
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Motivation – Top 1% wealth share
1920 1930 1940 1950 1960 1970 1980 1990 2000 20100
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Motivation – Top 1% wealth share
1920 1930 1940 1950 1960 1970 1980 1990 2000 20100
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
Is inequality as bad as in 1920?
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Motivation – Top 1% wealth share
1920 1930 1940 1950 1960 1970 1980 1990 2000 20100
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
Is inequality as bad as in 1920?
Social Security,
Unemployment InsuranceMedicare,
Medicaid
Expansion of
Social Security
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
This Paper
• Compute aggregate Social Security wealth
– Present value of future benefits, net of future taxes
– Based on Survey of Consumer Finances (SCF) for retirees
– Using Monte Carlo simulations for working households
• Distribute aggregate Social Security wealth between bottom 90% and top 10%
• Recompute the evolution of top wealth shares between 1989-2016
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
This Paper
• Compute aggregate Social Security wealth
– Present value of future benefits, net of future taxes
– Based on Survey of Consumer Finances (SCF) for retirees
– Using Monte Carlo simulations for working households
• Distribute aggregate Social Security wealth between bottom 90% and top 10%
• Recompute the evolution of top wealth shares between 1989-2016
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
This Paper
• Compute aggregate Social Security wealth
– Present value of future benefits, net of future taxes
– Based on Survey of Consumer Finances (SCF) for retirees
– Using Monte Carlo simulations for working households
• Distribute aggregate Social Security wealth between bottom 90% and top 10%
• Recompute the evolution of top wealth shares between 1989-2016
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Key finding – Top 1% wealth share
1920 1930 1940 1950 1960 1970 1980 1990 2000 20100
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
Including
Social Security
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
How Does Social Security Work?
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
How Does Social Security Work?
• Paying in
– 12.4% payoll tax: 10.6% to old-age program, 1.8% as disability
– NB: we exclude disability, conservative
– Up to cap (2019 $132,900)
• Benefits replace higher share for lower-wage workers
– Take best 35 years and adjust for inflation and real wage growth
– Replace
– 90% of AIYE below first bend point (2019: $11,112)
– 32% between first and second (2019: $66,996)
– 15% above the second
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
How Does Social Security Work?
• Paying in
– 12.4% payoll tax: 10.6% to old-age program, 1.8% as disability
– NB: we exclude disability, conservative
– Up to cap (2019 $132,900)
• Benefits replace higher share for lower-wage workers
– Take best 35 years and adjust for inflation and real wage growth
– Replace
– 90% of AIYE below first bend point (2019: $11,112)
– 32% between first and second (2019: $66,996)
– 15% above the second
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Stylized Facts:
Why does Social Security matter?
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Social Security promises are worth more than $30trSSA Estimates of NPV of Social Security Promises
01
02
03
04
02
01
8 D
olla
rs,
Trillio
ns
1985 1995 2005 2015
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Social Security benefits are fairly evenly distributed
0.1
.2.3
.4.5
.6In
co
me
Sh
are
1 2 3 4 5 6 7 8 9 10
Decile of Marketable Wealth
Social Security Benefits
Capital Income
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Stylized Facts:
Why did aggregate Social Security wealth increase?
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Social Security wage base increased
03
0,0
00
60
,00
09
0,0
00
12
0,0
00
20
18
Do
llars
1965 1975 1985 1995 2005 2015
Benefits Base
Wage Index
A. Benefits base and Wage index
01
23
x W
ag
e in
de
x
1965 1975 1985 1995 2005 2015
B. Benefits base/Wage index
Earnings exempt fromSocial Security
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Discount rates declined
Market Implied Nominal Yield Curve0
.03
.06
.09
An
nu
aliz
ed
Sp
ot
Ra
te
0 20 40 60 80 100Horizon
2016 2001 1989
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Boomers are reaching retirement age0
.1.2
Sh
are
of
Po
pu
latio
n
0−9 10−19 20−29 30−39 40−49 50−59 60−69 70−79 80−89 90+
1989 2016
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Methodology
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Defining Social Security wealth• Net present value of Social Security
Social Security Wealthit =T∑
s=c+66
(s−1∏k=t
(1−mitk)
)E [Benefitsit](1 + rts)s−t
−c+65∑
s=t+1
(s−1∏k=t
(1−mitk)
)E [Taxesit]
(1 + rts)s−t
– rts: market yield curve in year t– mitk: mortality rates for year t
• For retirees
Social Security Wealthit =T∑
s=t
(s−1∏k=t
(1−mitk)
)Benefitsit
(1 + rt,s)s−t
E[CPIs]CPIt
– Benefits are observed in the data
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Defining Social Security wealth• Net present value of Social Security
Social Security Wealthit =T∑
s=c+66
(s−1∏k=t
(1−mitk)
)E [Benefitsit](1 + rts)s−t
−c+65∑
s=t+1
(s−1∏k=t
(1−mitk)
)E [Taxesit]
(1 + rts)s−t
– rts: market yield curve in year t– mitk: mortality rates for year t
• For retirees
Social Security Wealthit =T∑
s=t
(s−1∏k=t
(1−mitk)
)Benefitsit
(1 + rt,s)s−t
E[CPIs]CPIt
– Benefits are observed in the data
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Social Security wealth of workers
• For each SCF survey year, we simulate mean Social Security wealth for each cohort andgender
• Simulating past and future earnings trajectories:
– Stochastic component: rich process estimated in Guvenen et al. (2019), which matches momentsfrom the cross-section and dynamics of earnings
– Life-cycle component: matches earnings per cohort×gender×year reported in Guvenen et al.(2018)
– Goal: emulating Social Security administrative panel data
• For each simulated path, we discount future benefits net of future taxes
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Social Security wealth of workers
• For each SCF survey year, we simulate mean Social Security wealth for each cohort andgender
• Simulating past and future earnings trajectories:
– Stochastic component: rich process estimated in Guvenen et al. (2019), which matches momentsfrom the cross-section and dynamics of earnings
– Life-cycle component: matches earnings per cohort×gender×year reported in Guvenen et al.(2018)
– Goal: emulating Social Security administrative panel data
• For each simulated path, we discount future benefits net of future taxes
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Social Security wealth of workers
• For each SCF survey year, we simulate mean Social Security wealth for each cohort andgender
• Simulating past and future earnings trajectories:
– Stochastic component: rich process estimated in Guvenen et al. (2019), which matches momentsfrom the cross-section and dynamics of earnings
– Life-cycle component: matches earnings per cohort×gender×year reported in Guvenen et al.(2018)
– Goal: emulating Social Security administrative panel data
• For each simulated path, we discount future benefits net of future taxes
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Calibration & Aggregation
• Social Security parameters
– We assume that parameters of Social Security formula scale up with the wage index– e.g. Earnings cap, bend points
– Consistent with the last 40 years
• Macroeconomic assumptions
– Discount rates: average nominal market yield curves (Fed Board)
– Inflation projections: historical SSA Annual Report
– Real growth rate of wages: historical SSA Annual Report
• Aggregation:
– We merge with the SCF the mean Social Security wealth by age×year×gender group
– We aggregate using SCF survey weight
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Validation – Simulated vs actual full-retirement-age benefits0
10
,00
02
0,0
00
1989 1995 2001 2007 2013
A. Men
Simulated
Data
01
0,0
00
20
,00
01989 1995 2001 2007 2013
B. Women
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Validation – Aggregate Social Security wealth0
10
20
30
40
20
18
Do
lla
rs,
Trillio
ns
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Social Security
Actuaries
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Validation – Aggregate Social Security wealth0
10
20
30
40
20
18
Do
lla
rs,
Trillio
ns
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Social Security
Actuaries
Our valuation using
SSA discount rates
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Validation – Aggregate Social Security wealth0
10
20
30
40
20
18
Do
lla
rs,
Trillio
ns
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Our valuation using real yield curve
(Treasury Inflation Protected Securities)
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Validation – Aggregate Social Security wealth0
10
20
30
40
20
18
Do
lla
rs,
Trillio
ns
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Our valuation using real yield curve
(Treasury Inflation Protected Securities)
Our valuation using the
nominal yield curve
and SSA inflation forecasts
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Assigning Social Security wealth
Social Security wealth by age in 20160
.51
1.5
Dol
lars
, Tril
lions
20 30 40 50 60 70 80 90Age
1. Simulation: aggregate Social Security wealth of 45 year-olds in 2016
• $555 billion
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Assigning Social Security wealth
Share of cohort in the Top 10%0
1020
30Pe
rcen
t
20 30 40 50 60 70 80 90Age
Top 1%Rest of Top 10%
2. SCF: To be in Top 10% overall, a 45 year-old need to be in the
• Top 5% of his cohort
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Assigning Social Security wealth
Wealthiest retirees’ share of Social Security wealth φt(x)0
.1.2
.3.4
.5.6
.7.8
.91
Shar
e of
Soc
ial S
ecur
ity W
ealth
0 20 40 60 80 100Wealthiest x%
3. SCF: for young retirees, share of Social Security wealth of top 5%
• 6.5%
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Assigning Social Security wealth
Social Security wealth by age in 20160
.51
1.5
Dol
lars
, Tril
lions
20 30 40 50 60 70 80 90Age
Top 1%Rest of Top 10%Bottom 90%
4. Split of Social Security wealth at age 45 in 2016
• 6.5% x $555 billion = $36 billion for top 10%• 93.5% x $555 billion = $519 billion for bottom 90%
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Top wealth shares0
.1.2
.3.4
.5.6
.7.8
1989 1995 2001 2007 2013
A. Top 10%
0.1
.2.3
.4.5
.6.7
.8
1989 1995 2001 2007 2013
B. Top 1%
with Social Security without Social Security
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Risk-Adjusted Valuation
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Systematic risk of Social Security (1)
• Returns on PAYG contributions depend on growth rate of population and per-capita earnings(Samuelson (1958))
• For US Social Security, wage-indexation explicitly ties returns to the performance of the labor market
– Tax cap follows wage index
– Parameters of benefit function (bend points) scale up with the wage index
→ Before age 60, +1% to wage-index ⇒ +1% to all Social Security cash flows
• Long-run relationship between the labor and stock markets implies that Social Security participantsare exposed to long-run systematic risk of the market portfolio(Geanakoplos and Zeldes (2010) and Catherine (2019))
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Aggregate risk-adjusted valuation0
10
20
30
40
20
18
Do
lla
rs,
Trillio
ns
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Top wealth shares0
.1.2
.3.4
.5.6
.7.8
1989 1995 2001 2007 2013
A. Top 10%
0.1
.2.3
.4.5
.6.7
.8
1989 1995 2001 2007 2013
B. Top 1%
Risk−free valuation Risk−adjusted valuation
No Social Security
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Risk-adjusted valuation: Wealth composition over time
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Discussion
• Role of interest rates
• Robustness
– Funding gap
– Life expectancy inequality
– Adjusting previous studies
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Role of interest rates
• Falling rates redistribute wealth from holders of short-duration assets to those withlong-term investments (Auclert (2019))
• Long duration bonds have performed exceptionally well over the last few decades(Binsbergen (2020))
• Social Security is a leveraged position
Replicating portfolio:– Sell short and medium maturity bonds– Buy very long maturity bonds
Share of Social Securitywealth in 1989 Change since 1989
Benefits Taxes Benefits Taxes NPV(a) (b) (c) (d) (a)·(c)+(b)·(d)
Bottom 99% 229% -129% +407% +118% +780%Top 1% 123% -23% +303% +282% +308%
Entire population 225% -125% +405% +119% +763%
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Role of interest rates
• Falling rates redistribute wealth from holders of short-duration assets to those withlong-term investments (Auclert (2019))
• Long duration bonds have performed exceptionally well over the last few decades(Binsbergen (2020))
• Social Security is a leveraged position
Replicating portfolio:– Sell short and medium maturity bonds– Buy very long maturity bonds
Share of Social Securitywealth in 1989 Change since 1989
Benefits Taxes Benefits Taxes NPV(a) (b) (c) (d) (a)·(c)+(b)·(d)
Bottom 99% 229% -129% +407% +118% +780%Top 1% 123% -23% +303% +282% +308%
Entire population 225% -125% +405% +119% +763%
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Role of interest rates
• Falling rates redistribute wealth from holders of short-duration assets to those withlong-term investments (Auclert (2019))
• Long duration bonds have performed exceptionally well over the last few decades(Binsbergen (2020))
• Social Security is a leveraged position
Replicating portfolio:– Sell short and medium maturity bonds– Buy very long maturity bonds
Share of Social Securitywealth in 1989 Change since 1989
Benefits Taxes Benefits Taxes NPV(a) (b) (c) (d) (a)·(c)+(b)·(d)
Bottom 99% 229% -129% +407% +118% +780%Top 1% 123% -23% +303% +282% +308%
Entire population 225% -125% +405% +119% +763%
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Funding gap
Projected funding gap in 2016 SSA Annual Report0
.2.4
.6.8
1S
ha
re o
f S
ch
ed
ule
d B
en
efits
2020 2040 2060 2080 2100 2120
Low cost
Intermediate cost
High cost
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Funding gap: Top shares (risk-adjusted)0
.1.2
.3.4
.5.6
.7.8
1989 1995 2001 2007 2013
A. Top 10%
0.1
.2.3
.4.5
.6.7
.8
1989 1995 2001 2007 2013
B. Top 1%
Low cost Intermediate cost
High cost No Social Security
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Adjusting for differences in life expectancy
01
00
00
02
00
00
03
00
00
0S
ocia
l S
ecu
rity
We
alth
1989 1995 2001 2007 2013
A. Top 10%
No Life Expectancy Adjustment
Life Expectancy Adjustment
01
00
00
02
00
00
03
00
00
0S
ocia
l S
ecu
rity
We
alth
1989 1995 2001 2007 2013
B. Bottom 90%
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Adjusting for differences in life expectancy0
.1.2
.3.4
.5.6
.7.8
1989 1995 2001 2007 2013
A. Top 10%
0.1
.2.3
.4.5
.6.7
.8
1989 1995 2001 2007 2013
B. Top 1%
No Life Expectancy Adjustment Life Expectancy Adjustment
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Adjusting other studies0
.1.2
.3.4
1989 1995 2001 2007 2013
A. Without Social Security
0.1
.2.3
.4
1989 1995 2001 2007 2013
B. With Social Security (Risk−adjusted)
SCF Saez & Zucman (2016)
Smith, Zidar & Zwick (2020) Batty et al. (2019)
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Adding Social Security to Smith, Zidar, and Zwick (2020)0
.1.2
.3.4
1989 1995 2001 2007 2013
A. Top 1%
0.0
5.1
.15
.2
1989 1995 2001 2007 2013
B. Top 0.1%
0.0
25
.05
.075
.1
1989 1995 2001 2007 2013
C. Top 0.01%
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Introduction How Does Social Security Work? Stylized Facts Methodology Risk-Adjusted valuation Discussion Conclusion
Conclusion
• Saez and Zucman (2016) argue that Social Security should not be taken into account because it wouldcall for the inclusion of other programs that reduce private savings and it would “not be clear where tostop”
• We argue that narrowly defined marketable wealth is not the right place to stop
– Social Security is 57% of the wealth of the bottom 90%
– Social programs can make marketable wealth inequality look worse
– Current wealth inequality measures cannot be used for policy evaluation
• Top wealth shares have not increased since 1989 when Social Security wealth is taken into account