Lifetime Earnings, Mortality, And Social Security Benefits: Implications For Reform

Abstract

The Social Security system is facing significant financial challenges, but politicians, economists, and other experts cannot agree on appropriate solutions.  Raising taxes and/or cutting benefits are never popular proposals, and competing groups want to protect the poor while at the same time maintain fairness for the more wealthy.  Recent studies, such as Cristia (2007), Duggan et al. (2007), and Waldron (2007), have shown a strong correlation between lifetime earnings and mortality, suggesting that differences in life expectancy between the wealthy and the less wealthy may be getting larger, thus eroding the progressivity of the Social Security system.  Our results show that for a mortality difference of one or two years, benefit reductions in the range of 2.5% to 16% would be needed to maintain the current level of progressivity for a male living to age 80.  If the mortality difference grows to four or five years, the benefit reductions would need to be much greater, anywhere from approximately 14% to 31%.  A reduction in benefits based on lifetime earnings can improve the long-run viability of the Social Security system while maintaining its current level of progressivity.