Social security and two-earner households

Kaygusuz, Remzi (2011): Social security and two-earner households.

Abstract

In the past decades, elimination of the pay-as-you-go system in U.S. has been extensively discussed and studied. Such an elimination would also eliminate the intra-cohort redistribution done by the following policies of social security. Due to spousal and survivor's benefit provisions, the system redistributes (mostly) to single-earner married households (not necessarily progressive). Retirement benefits are a concave function of past mean earnings. Hence, the system redistributes from high earners to low earners. Finally, the existence of a cap on social security taxable earnings makes the system regressive. This is the first paper that quantifies redistributive, labor supply, and welfare implications of these policies using a general equilibrium life-cycle model. Agents start out as permanently married or single and with education levels and wage profiles, where the latter depend both on education and gender. The household is the decision maker and decides on the labor supply of its member(s) and saving. The aggregate production function has as inputs capital and labor aggregated by efficiency. Elimination of these policies results in a 6.1% increase in married female labor force participation rate. The middle-income single-earner married households experience the largest welfare losses whereas the high-income two-earner households together with high-income single households experience the largest welfare gains.

• Item Type: MPRA Paper
• Language: English
• Keywords: Social Security, Two-earner households, Labor Force Participation
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H5 - National Government Expenditures and Related Policies > H55 - Social Security and Public Pensions; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H31 - Household; J - Labor and Demographic Economics > J1 - Demographic Economics > J12 - Marriage ; Marital Dissolution ; Family Structure ; Domestic Abuse

References

Altonji, J. G., "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, vol. 94, no.3, (June 1986), S176-S215.

Auerbach, A. J. and L. J. Kotlikoff, "Dynamic Fiscal Policy," Cambridge University Press, Cambridge, 1987.

Blau, D. M., "Social Security and The Labor Supply of Older Married Couples," Labour Economics, vol. 4, no. 4, (December 1997), 373-418.

Blau, D. M., " Labor Force Dynamics of Older Married Couples," Journal of Labor Economics, vol. 16, no. 3, (July 1998), 595-629.

Blundell, R. and T. E. MaCurdy, "Labor Supply: a Review of Alternative Approaches," In Handbook of Labor Economics, vol. 3A, ed. O. A Ashenfelter and D. Card, Amsterdam: North Holland, 1599-1695.

Carlson, A. C, "Making Social Security Reform Family-Friendly," Family Research Council, (February 2005), http://www.frc.org/get.cfm?i=PL05C01.

Chang, Y. and S. Kim. "From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous-Agent Macroeconomy," International Economic Review, vol. 47, no.1, (2006), 1-27.

Cho, J.O. and T. F. Cooley, "Employment and Hours Over The Business Cycle," Journal of Economic Dynamics and Control, vol. 18, no.2, (March 1994), 411-432.

Cho, J. and R. Rogerson, "Family Labor Supply and Aggregate Fluctuations," Journal of Monetary Economics, vol. 21, no. 2, (March 1988), 233-245.

Conesa, J. C. and D. Krueger, "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, vol.2., no. 4, (July 1999), 757-795.

De Nardi, M., S. İmrohoroğlu and T. J. Sargent , "Projected U.S. Demographics and Social Security," Review of Economic Dynamics, vol.2., no. 3, (July 1999), 575-615.

Eckstein, Z. and E. Nagypál, "The Evolution of U.S. Earnings Inequality: 1961-2002," Federal Reserve Bank of Minneapolis Quarterly Review, vol. 28, no. 2, (December 2004), 10-29.

Eissa, N., "Taxation and The Labor Supply of The Women: The Tax Reform Act of 1986 As A Natural Experiment," NBER Working Paper, #5023, 1995.

Eissa, N. and H. Hoynes, "Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply," NBER Working Paper, #11729, 2005.

Fuster, L., "Is Altruism Important for Understanding the Long-Run Effects of Social Security," Review of Economic Dynamics, vol.2., no. 3, (July 1999), 616-637.

Fuster, L., A. İmrohoroğlu and S. İmrohoroğlu, "A Welfare Analysis of Social Security In a Dynastic Framework," International Economic Review, vol. 44, no.4, (November 2003), 1247-1274.

Fuster, L., A. İmrohoroğlu and S. İmrohoroğlu, "Elimination of Social Security in a Dynastic Framework," The Review of Economic Studies, vol. 74, no. 1, 2007, 113-145. Gouveia, M. and R. P. Strauss, "Effective Federal Individual Income Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, vol. 40, no. 2, (June, 1994), 317-339.

Guner, N., R. Kaygusuz and G. Ventura, "Taxation, Aggregates and The Household," forthcoming at The Review of Economic Studies.

Gustman, A. L. and T. L. Steinmeier. "How Effective Is Redistribution Under The Social Security Benefit Formula?," Journal of Public Economics, vol. 82, no.1,(October 2001), 1-28.

Gustman, A. L. and T. L. Steinmeier. "Social Security, Pensions and Retirement Behaviour Within The Family," Journal of Applied Econometrics, vol. 19, no.6,(Special Issue 2004), 723-737.

Huang, H., S. İmrohoroğlu and T. J. Sargent , "Two Computations to Fund Social Security," Macroeconomic Dynamics, vol. 1., no. 1, (March 1997), 7-44.

Hubbard, R. G. and K. L. Judd, "Social Security and Individual Welfare: Precautionary Saving, Borrowing Constraints, and The Payroll Tax" The American Economic Review, vol. 77, no. 4, (September 1987), 630-646.

Huggett, M. and J. C. Parra, "How Well Does the U.S. Social Insurance System Provide Social Insurance?," Journal of Political Economy, vol. 118, no. 1, (2010), 76-112.

Huggett, M. and G. Ventura, "On the Distributional Effects of Social Security Reform," Review of Economic Dynamics, vol.2., no. 3, (July 1999), 498-531.

İmrohoroğlu, A. , S. İmrohoroğlu and D. Joines, "A Life Cycle Analysis of Social Security," Economic Theory, vol. 6, no.1, (June 1995), 83-114.

Internal Revenue Service Statistic of Income Division, Individual Income Tax Returns, 2000.

Kaygusuz, R. "Taxes and Female Labor Supply," Review of Economic Dynamics, vol. 13, no. 4, (October 2010), 725-741.

Kimmel, J. and T. J. Kniesner, "New Evidence on Labor Supply: Employment Versus Hours Elasticities by Sex and Marital Status," Journal of Monetary Economics, vol. 42, no. 2, (July 1998), 289.301.

Kotlikoff, L. J., K. Smetters and J. Walliser , "Opting Out of Social Security and Adverse Selection," NBER Working Paper, #6430, 1998a.

Kotlikoff, L. J., K. Smetters and J. Walliser, "Social Security: Privatization and Progressivity," The American Economic Review, vol. 88, no. 2, (May 1998b), 137-141.

Kotlikoff, L. J., K. Smetters and J. Walliser , "Privatizing Social Security in the United States - Comparing the Options," Review of Economic Dynamics, vol.2., no. 3, (July 1999), 532-574.

Liebman, J. " Redistribution in the Current U.S. Social Security System", in Martin Feldstein and Jeffrey B. Liebman editors, The Distributional Aspects of Social Security and Social Security Reform (Chicago: University of Chicago Press), 2002.

MaCurdy, T. E., "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, vol. 89, no. 6, (December 1981), 1059-1085.

Mare, R. D. and C. R. Schwartz, "Trends in Educational Assortative Marriage from 1940 to 2003." Demography, vol. 42, no.4, (November 2005), 621-626.

Sanchez-Martin, A. R. and V. S. Marcos, "Demographic Change, Pension Reform and Redistribution in Spain" Fiscal Studies, vol. 31, no. 3 (2010), 405-452.

McCaffery, E. J., Taxing Women, The University of Chicago Press, Chicago, 1997.

Mulligan, C. B., " Aggregate Implications of Indivisible Labor," Advances in Macroeconomics, vol.1, no.1, (2001).

Nicolaou, C. and R. Stanfield, "Social Security: Out of Step with the Modern Family," Urban Institute, (April 2000), http://www.urban.org/url.cfm?ID=310233.

Nishiyama, S., "The Joint Labor Supply Decision of Married Couples and the Social Security Pension System" manuscript, Georgia State University, September 2010.

Nishiyama, S. and K. Smetters, "Does Social Security Privatization Produce Efficiency Gains?," Quarterly Journal of Economics, vol. 122, no., (November 2007), 1677-1719.

Olivetti, C., "Changes in Women's Aggregate Hours of Work: The Role of Returns to Experience," Review of Economic Dynamics, vol.9 no.4, (October 2006), 557-587.

Rix, S. E. and J. B. Williamson, "Social Security Reform: Implications for Women," Journal of Aging & Social Policy, vol. 11, no. 4, (Summer 2000), 41-68.

Rogerson, R. and J. Wallenius, "Micro and Macro Elasticities in a Life Cycle Model with Taxes," Journal of Economic Theory, vol. 144, no. 6, (November 2009), 588-601.

Storesletten, K., C. I. Telmer and A. Yaron, "The Risk Sharing Implications of Alternative Social Security Arrangements," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50, (June 1999), 213-259.