The Progressivity of Social Security

Jeffrey R. Brown, Julia Lynn Coronado, Don Fullerton

NBER Retirement Research Center Paper No. NB 06-10
Issued in December 2006

This paper provides new evidence on the progressivity of the Social Security retirement program. Using the PSID, we explore how progressivity differs depending on the definition of income, how it is affected by the measure of progressivity used, and how progressivity may change over time due to differences in the economic behavior of successive cohorts. We have four major findings. First, we find that when progressivity is measured using more comprehensive concepts of income, the Social Security system exhibits less overall progressivity than when it is evaluated using more narrow definitions of income. Indeed, when evaluated using potential labor earnings at the household level (rather than actual earnings at the individual level), the Social Security retirement program exhibits virtually no overall progressivity as measured by the change in the Gini coefficient. Second, we find that this result is largely driven by the lack of progressivity (and in some cases, the presence of regressivity) in the middle and upper part of the income distribution, which masks the presence of positive, if small, net transfers to the bottom income quintile. Third, we find that even when there is redistribution occurring, it is not efficiently targeted, with many high income households receiving net transfers, while many low income households pay net taxes. Finally, we show that the extent to which progressivity differs across cohorts depends on the income concept used.

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This paper is a revision of the earlier NBER working paper w7520, The Progressivity of Social Security, Julia Lynn Coronado, Don Fullerton, Thomas Glass