Academic journal article Social Security Bulletin

Education, Earnings Inequality, and Future Social Security Benefits: A Microsimulation Analysis

Academic journal article Social Security Bulletin

Education, Earnings Inequality, and Future Social Security Benefits: A Microsimulation Analysis

Article excerpt

Over the last three decades, earnings have grown faster for college graduates than for workers without a 4-year college degree. Such wage-growth differentials could affect the Social Security benefits and other retirement income of future retirees. A Social Security Administration microsimulation model, Modeling Income in the Near Term (MINT), can estimate the distributional effects of Social Security reform proposals under alternative economic scenarios. We use MINT to estimate the effect of wage-growth differentials by educational attainment on the future earnings and Social Security benefits of individuals born during 1965-1979, sometimes referred to as "Generation X." For those individuals, we find that different rates of wage growth by educational attainment would substantially increase the gap in annual earnings between college graduates and nongraduates. Differences in Social Security benefits would increase by a smaller proportion because of Social Security's long-term averaging of earnings and its progressive benefit calculation formula.

Introduction

Social Security benefits are the most widely received source of income among Americans aged 65 or older, and they are the largest source of income for more than half of aged beneficiaries (Social Security Administration [SSA] 2014). In light of Social Security's importance to current and future retirees, economic trends that could affect workers' retirement benefits are of interest to SSA, Congress, and the public. One such trend is growing inequality in earnings.

In general, Social Security benefits increase with career-average earnings, and earnings increase with education and work experience.1 Many personal, social, and economic variables affect lifetime earnings, but social scientists have long recognized the central role played by educational attainment. More than a half-century ago, economists Jacob Mincer (1958) and Gary Becker (1964) proposed theories of human capital in which the knowledge, skills, and abilities acquired through formal education strongly influence both employment and earnings. Those theories continue to inform much research in economics, sociology, and public policy today.

Economists and other social scientists typically are cautious about attributing causation to relationships that may be mere correlations. Nevertheless, the empirical evidence gathered over more than 50 years is so compelling that asserting a cause-and-effect relationship between education and earnings would likely encounter little disagreement among those who study labor markets (Card 1999, 2002; Heckman, Lochner, and Todd 2003).2

The rapidly rising cost of higher education might call into question whether attending college continues to be worth the expense. However, recent research suggests that earning a 4-year college degree remains a good investment for the average student. Researchers at the Federal Reserve Bank of San Francisco found that college graduates fully recoup the costs of higher education by age 40, on average; and that in inflationadjusted terms, "a college graduate can expect to earn $830,800 more than a high school graduate over the course of a lifetime" (Daly and Bengali 2014). The authors found that the lifetime earnings premium for college graduates resulted not just from higher annual salaries, but also from lower rates of unemployment, even during times of recession. A separate analysis by researchers at the Federal Reserve Bank of New York found that the financial return of a college education "has remained high in spite of rising tuition and falling earnings because the wages of those without a college degree have also been falling, keeping the college wage premium near an all-time high while reducing the opportunity cost of going to school" (Abel and Deitz 2014).

If the earnings of college graduates rise more rapidly (or fall more slowly) than the earnings of workers without a 4-year degree, earnings inequality will increase-all else being equal. …

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