Rising Tides and Retirement: The Aggregate and Distributional Effects of Differential Wage Growth on Social Security

Source: Melissa Favreault, Urban Institute, April 01, 2009

From the abstract:
Recent growth in wage inequality has important implications for Social Security solvency and benefit distributions. Because only earnings below the taxable maximum are subject to payroll taxes, concentrated wage growth among higher earners generates less revenue than more evenly distributed growth. Social Security’s progressive benefit formula increases benefit payouts when shares of workers with low wages grow. We use a dynamic microsimulation model to examine aggregate and distributional consequences of alternative scenarios about future wage growth. We find that relatively modest changes in assumptions about wage differentials generate marked changes in projected Social Security benefits, poverty, and long-term financing status.

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