Macro Talk – Pavel Brendler (Wisconsin School of Business)

Event details

  • | Friday, January 19
  • 12:00 PM
  • Seminar Room, Kaiserplatz 7-9, 4th Floor

TEarnings Inequality and Income Redistribution Through Social Security

Despite increasing earnings inequality and aging population, Social Security replacement rates in the U.S. have not been changed since 1977. In this paper, I ask what an optimal Social Security policy might look like in 2017. Using a general equilibrium overlapping generations model with heterogeneous agents and incomplete markets, I recover the Pareto weights consistent with the Social Security Amendments of 1977. I find that the government in 1977 must have put a large weight on the young and middle-aged workers, with the largest weight on the middle-aged with medium earnings records. Applying the same weights in 2017, the optimal Social Security policy differs substantially from the current system. Conversely, assuming the existing policy is optimal throughout the period, the changes in the implied Pareto weights during 1977- 2017 reveal a shift from favoring young and middle-aged workers with medium income to favoring earnings-rich households.

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