Academic journal article Social Security Bulletin

Social Security Research at the Michigan Retirement Research Center

Academic journal article Social Security Bulletin

Social Security Research at the Michigan Retirement Research Center

Article excerpt

Selected Abbreviations

CAMS Consumption and Activities Mail Survey

DB defined benefit

DC defined contribution

DI Disability Insurance

HRS Health and Retirement Study

MRRC Michigan Retirement Research Center

SSI Supplemental Security Income

Introduction

Social Security has been a topic of widespread discussion in the last decade. Rising longevity and falling fertility have led to an aging population, which increases solvency challenges for the Social Security system. Public concerns over low national saving have led to an extensive dialog on the merits of reform that might change the U.S. system into one with fully or partially funded personal accounts. Meanwhile, pensions in the private sector have been evolving from predominantly defined benefit (DB) to predominantly defined contribution (DC), raising concerns that workers preparing for retirement have more personal responsibility, with more complex financial challenges, than ever before.

The Office of Retirement and Disability Policy at the Social Security Administration (SSA) created the Retirement Research Consortium (RRC) in 1998 to encourage research on topics related to Social Security and the well-being of older Americans, and to foster communication between the academic and policy communities- in particular, through an annual research conference in Washington, D.C.1 The Michigan Retirement Research Center (MRRC) has been part of that effort for more than a decade. This article surveys a selection of MRRC output2 and highlights principal themes in the Center's ongoing research.

From its inception, many MRRC researchers have specialized in quantitative analysis using microeconomic data. The single most important data set for this work is the University of Michigan's Health and Retirement Study (HRS), a panel survey representative of the U.S. population older than age 50, with complementary information on Social Security and pension benefits. (Primary support for the HRS comes from the National Institute of Aging; however, SSA provides important supplementary support. SSA also provides earnings histories of HRS respondents and spouses who consent.) MRRC and the HRS work closely together.

Many analyses of possible Social Security reforms and related policy issues begin with the so-called "life-cycle model" of Nobel laureate Franco Modigliani (1986). It forms the conceptual framework underlying most empirical studies, and much of the research reviewed in this paper employs the life-cycle model. As its name implies, the model follows household members through their life spans. A household starts with a young adult single or couple. Earnings tend to rise as one ages, until abruptly ending at retirement. The premise of the model is that a household's desired lifetime consumption profile is likely to be relatively flat. A household should therefore save during its peak earning years to accumulate assets that will enable it to maintain its standard of living, that is to say its consumption, after retirement. Thus, the model indicates motives for saving. It posits for each household a criterion, or "utility function," which measures the satisfaction derived from lifetime consumption. A household's lifetime consumption aims to maximize this utility function, subject to its budget constraints. The latter make a household's consumption options conditional on its earnings. Generalizing the criterion to reflect a household's valuation of leisure time, we can use the model to study choices of how much to work and when to retire. The attributes of the utility function will characterize a household's tolerance for risk; hence, one can use the model to explain portfolio choices at different ages. In fact, the model can admit many details and complexities.

Social Security Reform

One of the topics of greatest interest to MRRC researchers in recent years has been possible reform of the Social Security system. …

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