Tuesday, January 27, 2009

New paper: “A Progressivity Index for Social Security”

I have a new paper out through the Social Security Administration co-authored with my SSA colleagues Mark Sarney and Chris Tamborini called "A Progressivity Index for Social Security." The goal of the paper was to find better descriptive measures of redistribution within Social Security. Here's the abstract followed by a quick explanation:

Using the Social Security Administration's MINT (Modeling Income in the Near Term) model, this paper analyzes the progressivity of the Old-Age, Survivors and Disability Insurance (OASDI) program for current and future retirees. It uses a progressivity index that provides a summary measure of the distribution of taxes and benefits on a lifetime basis. Results indicate that OASDI lies roughly halfway between a flat replacement rate and a flat dollar benefit for current retirees. Projections suggest that progressivity will remain relatively similar for future retirees. In addition, the paper estimates the effects of several policy changes on progressivity for future retirees.

The key approach was to calculate the percentage of total benefits received by individuals paying a given percentage of total taxes. Here's a chart which helps explain things. The horizontal axis shows the percentage of total lifetime taxes paid by members of a given birth cohort, while the vertical axis shows the percentage of total lifetime benefits received. For instance, we can see that individuals paying the bottom 50 percent of total taxes receive around 61 percent of total benefits. This indicates that the program is progressive, if modestly so.

Using these curves, we calculate a single summary measure based on the Gini coefficient. A system with no redistribution – meaning that people received benefits exactly in proportion to their contributions – would have a progressivity value of zero. Similarly, a system in which everyone received the same flat dollar benefit regardless of contributions would have a progressivity value of around 0.33. The progressivity value for current law Social Security is around 0.16, leading us to conclude that Social Security is (very roughly) around half way between a pure defined contribution program and a flat dollar benefit in terms of its progressivity.

We also calculate how Social Security progressivity has changed over time, and how common Social Security reforms might alter overall system progressivity. There's some interesting stuff here, and thank my co-authors for all their hard work.


Michael said...

This seems very similar to a Suits index, but comparing benefits to taxes as opposed to taxes and income.

Andrew G. Biggs said...

Good catch. I believe we say in the paper that it's close to a Suits index; in an earlier draft there was more discussion of the Suits index but I think most of it got pulled for length.