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

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. However, earnings inequality in itself is not necessarily bad. Indeed, if earning a college degree did not produce higher lifetime earnings for the typical graduate, acquiring a college degree would not be a worthwhile investment of time and money. In some respects, earnings inequality is like the extra weight that many of us carry around: What matters is how much you have, where you have it, and how fast it is growing.

Abundant research indicates that the United States has more earnings inequality than other developed nations, that the inequality is evident throughout the earnings distribution (not just between the top 1 percent and everyone else), and that it has grown substantially in recent years (Bowlus and Robin 2004; Lemieux 2006; Goldin and Katz 2007; Autor, Katz, and Kearney 2008; Favreault 2009; Favreault and Haaga 2013; Autor 2014; Mitchell 2014). One dimension along which U.S. earnings inequality has grown is the difference in annual and lifetime earnings between workers with a 4-year college degree and those without (Abel and Deitz 2014; Daly and Bengali 2014; Pew Research Center 2014). …

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