NB20-06: Social Security Reform with Heterogeneous Mortality

We propose to identify optimal changes to Social Security when both income and mortality inequality are present. We will develop a life-cycle model to evaluate four sets of parametric reforms to Social Security under current and projected future demographics: 1) adjusting the benefit formula; 2) changing the payroll tax rate and the upper bound on taxable earnings; 3) adjusting the early retirement penalties and delayed retirement credits; 4) adjusting benefit levels for those aged 80 and older who outlive their life expectancy. Comparing outcomes using two sets of demographic assumptions will provide insights about how the joint increase in life expectancy and mortality inequality affects the optimal design of Social Security. Compared to previous structural analyses of US Social Security reforms, the model developed under this proposal features heterogeneous mortality rates that display an income gradient; all else equal, individuals with high earnings will on average live longer than those whose earnings are low. In addition, the model incorporates the risks of requiring Disability Insurance and nursing home stays. We will proceed as follows:
● Analyze data and calibrate the benchmark model ● Conduct counterfactual experiments ● Draft the paper and present at conferences for feedback
● Produce the final paper and non-technical report