Estimating the Effects of Changing Social Security Benefit Formulas

Abstract

[Excerpt] The U.S. Social Security system faces serious financial difficulties in both the short and the long run. The short-run problem is that the system has very meager financial reserves. In the long run—after the year 2010, when the post-World-War-II baby-boom generation reaches retirement age—the financial problems of Social Security will intensify because of population aging and the consequent decline in the ratio of workers to retirees. These problems have led to proposed reforms aimed at assuring the financial stability of the system. The question addressed here is: what effects would these reforms have on three variables—retirement ages, retirement incomes, and the Social Security system? This paper highlights the estimated effects of four actual or proposed policy changes. The basic model and some of the effects are drawn from previous work. However, the estimates of the effects of Social Security reforms on the Social Security system itself are new.