BRENDAN CUSHING-DANIELS, Gettysburg College
Email: bdaniels@gettysburg.edu
C. EUGENE STEUERLE, Urban Institute
Email: esteuerl@ui.urban.org

Traditional analyses of retirement decisions focus on the age, from birth, of the individual making choices about how much to work, consume, and save for old age. However, remaining life expectancy is arguably a better way of examining these issues. As mortality rates decline, people at a given age now have more remaining years of life expectancy than they did in the past. If participation rates at older ages remain constant (or decline), then average time spent in retirement will increase. Additionally, because health status and mortality are correlated, adults with more expected years of life are generally in better health (and better able to work) than those with fewer years of remaining life.

This paper examines labor force participation rates of older workers considering both chronological age and remaining life expectancy. Results show that participation by remaining life expectancy declines for men through the early 1990s, leveling off in the next decade. However, participation by age have been rising for men in their sixties since the mid-1990s. Whether we specify the empirical model by age or by remaining life expectancy, ages 62 and 65 both have strong negative effects on participation, confirming a major role in retirement decisions for Social Security. Finally, we find that controlling for other factors - education, marital status, and business cycle effects - magnifies the decline in participation attributable to cohort effects for men born between 1900 and 1960, but reduces the importance of cohort effects for women born in these years.

ALESSANDRO CIGNO, Dipartimento di Studi sullo Stato, CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Institute for the Study of Labor (IZA), Centre for Household, Income, Labour and Demographic Economics (CHILD)
Email: CIGNO@UNIFI.IT

Conventional pension systems suffer from a design defect which makes them financially unsustainable, and a source of inefficiency for the economy as a whole. The paper outlines a second-best policy which includes a public pension system made up of two parallel schemes, a Bismarckian one allowing individuals to qualify for a pension by working and paying contributions in the usual way, and an unconventional one allowing them to qualify for a pension by having children, and investing time and money in their upbringing.

LAURA A. SULLIVAN, Brandeis University
Email: lauras@brandeis.edu
TATJANA MESCHEDE, Institute on Assets and Social Policy
Email: meschede@brandeis.edu
THOMAS M. SHAPIRO, Brandeis University - The Heller School for Social Policy and Management

The existing Social Security special minimum benefit, which offers an alternative benefit formula for long-term workers with low levels of wages across many years, has the potential to reduce poverty among the elderly, while rewarding significant numbers of working years. The paper proposes tying the benefit formula for the special minimum benefit to a modernized poverty measure based on the National Academy of Sciences (NAS) recommendations, or about 125 percent of the current poverty threshold.

An increase in the special minimum benefit will affect access to means-tested social supports for seniors. Thus, the paper outlines the potential interaction effects that would occur with an increase the special minimum benefit for low-income seniors who currently benefit from Supplemental Security Income (SSI), Medicaid, and the Supplemental Nutrition Assistance Program (SNAP) and provides several policy options for addressing program interactions. Proposals include policies to ensure maintenance of Medicaid eligibility for special minimum beneficiaries as well as increases in the general income exclusion and asset limits in SSI, which are not indexed to inflation. The authors suggest that through an enhancement of the Social Security special minimum benefit and a modernization and coordination of program rules for other programs affecting low-income seniors, policymakers can do much to enhance the social safety net for seniors with low lifetime earnings.

This Working Paper was completed with support from the National Academy of Social Insurance and the Rockefeller Foundation through their Strengthening Social Security for Vulnerable Groups project.

JEFFREY R. BROWN, University of Illinois at Urbana-Champaign - Department of Finance, National Bureau of Economic Research (NBER)
Email: brownjr@uiuc.edu
JULIA LYNN CORONADO, Barclays Capital
Email: julia.coronado@barcap.com
DON FULLERTON, University of Illinois at Urbana-Champaign - Department of Finance, National Bureau of Economic Research (NBER), CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Email: dfullert@illinois.edu

Building on the existing literature that examines the extent of redistribution in the Social Security system as a whole, this paper focuses more specifically on how Social Security affects the poor. This question is important because a Social Security program that reduces overall inequality by redistributing from high income individuals to middle income individuals may do nothing to help the poor; conversely, a program that redistributes to the poor may nonetheless be regressive according to broader measures if it also redistributes from middle to upper income households. We have four major findings. First, as we expand the definition of income to use more comprehensive measures of well-being, we find that Social Security becomes less progressive. Indeed, when we use an "endowment" defined by potential labor earnings at the household level, rather than actual earnings at the individual level, we find that Social Security has virtually no effect on overall inequality. Second, we find that this result is driven largely by the lack of redistribution across the middle and upper part of the income distribution, so it masks some small positive net transfers to those at the bottom of the lifetime income distribution. Third, in cases where redistribution does occur, we find it is not efficiently targeted: many high income households receive positive net transfers, while many low income households pay net taxes. Finally, the redistributive effects of Social Security change over time, and these changes depend on the income concept used to classify someone as "poor".

MELISSA FAVREAULT, The Urban Institute
Email: MFAVREAU@UI.URBAN.ORG

Recent growth in wage inequality has important implications for Social Security solvency and the distribution of benefits. Because only earnings below the taxable maximum are subject to Social Security payroll taxes, wage growth that is concentrated among very high earners will generate lower tax receipts than wage growth that is more evenly distributed. The progressivity of the Social Security benefit formula increases benefit payouts when the share of workers with low wages grows. This study uses a dynamic microsimulation model to examine the aggregate and distributional consequences of alternative scenarios about the distribution of future wage growth among workers. We find fairly marked changes in projected Social Security benefit distributions, poverty, and long-term financing status with relatively modest changes in assumptions about wage differentials.

KAIJI CHEN, University of Oslo
Email: kaijic@econ.uio.no

This paper incorporates two features of housing in a life-cycle analysis of social security: housing as a durable good and housing market frictions. We find that with housing as a durable good, unfunded social security substantially crowds out housing consumption throughout the life cycle. By contrast, aggregate non-durable consumption is higher when social security is present, although it is postponed until late in life. Moreover, in the presence of housing market frictions, social security lowers the aggregate home ownership rate and reduces the average size of owner-occupied housing. The effects of social security on housing position, furthermore, exhibit substantial heterogeneity across households of different income levels.

IRENE MUSSIO, Watson Wyatt Worldwide
Email: irene.mussio@watsonwyatt.com
NATALIA GARABATO, Watson Wyatt Worldwide
Email: natalia.garabato@watsonwyatt.com
WATSON WYATT TECHNICAL PAPER SERIES, Watson Wyatt Worldwide
Email: Shipra.Sharma@eu.watsonwyatt.com

Public pension schemes are most often discussed from a social welfare and public policy point of view. Nevertheless, the design of public pensions should also be taken into close consideration by companies planning and designing private pension plans for their employees. Social security and private pensions are both very important parts of retirement resources for the vast majority of the population and the adequacy of these resources thus depends not only on the generosity of social security but also on the financial commitment employers choose to make to private arrangements.

In this sense, private pensions come to complement social security benefits and, in many cases, they are either explicitly or implicitly integrated with public provision. In many countries, private pension designers consider projected social security benefits and contributions when defining their overall benefit strategy. It is vital, nevertheless, that more employers take into account the specificities of first pillar pensions in each country so as to develop benefit packages that complement social security benefits effectively.

Accordingly, in the following paper we will examine and analyze social security systems across eight developed nations (Canada, France, Germany, Italy, Japan, Netherlands, UK and US). We have based our comparison on three key aspects: the generosity of state benefits; whether the focus rests on the insurance or redistributive role of social security; and the long term sustainability of public pensions. We will show that the way in which these aspects are defined and interact have different implications in terms of how companies plan and design the retirement benefits offered to employees.