Differential mortality and the progressivity of social security

Abstract

There is a well-established negative correlation between earnings and mortality risk. Using a calibrated general-equilibrium macroeconomic model, this paper examines how this correlation interacts with the welfare implications of Social Security's benefit-earnings rule. My primary findings suggest that the welfare ranking of alternative benefit-earnings rules is somewhat sensitive to differential mortality. Due to their relatively high mortality risk, households with unfavorable earnings histories heavily discount the expected utility from old-age consumption, and therefore do not put much weight on better work-retirement consumption smoothing. Because of this reason, Social Security's benefit-earnings rule warrants less redistribution in the presence of differential mortality, compared to when mortality risk is uncorrelated to earnings. I find that this result continues to hold when household-level labor supply distortions are ignored, and also when an alternative “maximin” welfare criterion is considered, but not when accidental bequests from the deceased are redistributed to the survivors.