A historical welfare analysis of Social Security: Whom did the program benefit?

Abstract

A well‐established result in the literature is that Social Security reduces steady state welfare in a standard life cycle model. However, less is known about the historical quantitative effects of the program on agents who were alive when the program was adopted. In a computational life cycle model that simulates the Great Depression and the enactment of Social Security, this paper quantifies the welfare effects of the program's enactment on the cohorts of agents who experienced it. In contrast to the standard steady state results, we find that the adoption of the original Social Security generally improved these cohorts' welfare, in part because these cohorts received far more benefits relative to their contributions than they would have received if they lived their entire life in the steady state with Social Security. Moreover, the negative general equilibrium welfare effect of Social Security associated with capital crowd‐out was reduced during the transition, because it took many periods for agents to adjust their savings levels in response to the program's adoption. The positive welfare effect experienced by these transitional agents offers one explanation for why the program that may reduce welfare in the steady state was originally adopted.

Idiosyncratic Risk, Aggregate Risk, and the Welfare Effects of Social Security

“…Other related papers are Ludwig and Reiter (), who assess how pension systems should optimally adjust to demographic shocks, Olovsson (), who contends that pension payments should be highly risky because this increases precautionary savings and thereby capital formation, Peterman and Sommer (, ), who discuss the insurance benefits of social security in the Great Depression and the Great Recession, respectively, modeling each event as a one‐time macroeconomic shock, and, finally, Gomes et al. (), who use a model similar to ours to study how changes in fiscal policy and government debt affect asset prices and the wealth distribution.…”