Should Social Security Benefits Increase with Age?
NBER Working Paper No. 2200
This paper shows that the optimal relation between social security benefits and retiree age depends on balancing the advantage of providing an otherwise unavailable actuarially fair annuity against the lower rate of return earned in a pay-as-you-go social security system. The ability of compulsory social security programs to provide an actuarially fair annuity implies that benefits should increase with age while the lower return on social security contributions than on private saving implies that a larger fraction of total benefits should be paid during the early years of retirement. In an economy that contains a mixture of rational life cycle savers and completely myopic individuals who do no saving, it is optimal for benefits to decline during the earlier part of the retirement period and then to begin rising. Numerical calculations based on actual macroeconomic parameters and representative survival probabilities suggest that the optimal age for minimum benefits occurs before age 75.
Published: Published as "Should Social Security Benefits Be Means Tested?", JPE, Vol. 95, no. 3 (1987): 468-484.