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Sylvain Catherine: We have known for
decades that at some point during the— around the year 2033
or 2035— this date has moved a
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little bit. At some point, the
Social Security Trust Fund, which are the reserves of the
Social Security system, is going
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to run out of money. When this
happens, Social Security will not be able to pay the benefit
in full. Based on the current
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estimate, it will be able to pay
75% of the benefits. So at this point, there will need to be a
reform. Either you will have to
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raise the level of payroll taxes
that form Social Security, or you will have to lower the
benefits or to move the
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retirement age. - Welcome to <i>The Ripple Effect</i>,
the podcast that takes you on a
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journey through the minds of
Wharton faculty. I'm your host, Dan Loney, and in each episode,
we'll be diving deep into the
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inspiration behind the
groundbreaking research that Wharton professors have
conducted and exploring how
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their findings resonate with the
world today. When you think about retirement, there's no
doubt that part of the
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discussion ends up being around
Social Security and what it means for Americans. But when
you factor it in when you're
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looking at wealth inequality, is
there a difference in what it is now compared to, say, a few
decades ago? That's part of the
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research done by our guest here
today, Sylvain Catherine, who is an Assistant Professor of
Finance here at the Wharton
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School. Sylvain, great to talk to
you again. How are you? I'm great. Thanks for having me.
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Thank you. Let's start, I guess, with the back story on looking
at this— these aspects of wealth
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inequality tied to Social
Security. right? So as you mentioned, when
people think of retirement, a
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big part of it is Social
Security. Actually, for most Americans, most of their income
during the retirement period
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does not come from the stock of
wealth that they have at the beginning, but comes from the
Social Security benefits that
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they receive. Now, all those
promises that the government make, they have value. So you
could think of it like, if you
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were to go on the private
market, you could buy an annuity, and that annuity would
basically offer exactly the same
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type of terms as Social Security.
It would, like, provide a monthly payment until the end of your
life. So there is a market value
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for what the government
provides. And so one question is, once you try to value those
benefits, the ones that you have
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already accrued because you have
contributed into the system, what's the value of this? How
does it change the level of
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inequalities that we see today,
and does it change also the trends in wealth inequality?
Because when we look at wealth
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excluding Social Security, we
see a steady increase in wealth inequality since more or less
the mid 1980s. But what we find
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in our paper is that once you
factor in Social Security, this positive trend in wealth
inequality basically disappears.
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So when you think about value
for Social Security, how has that changed over the last several
decades?
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So it has changed
enormously, and this has implication both for households
but also for the government.
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Because, of course, what we
consider as an asset for households is going to be a
liability for the government.
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But we are talking about, I
think right now, something that is close to $50 trillion, where,
like, the total stock of wealth
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excluding Social Security in the
US would be slightly more than $100 trillion. So you have, like,
1/3 of the total that is Social
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Security, and which was not
considered in inequality statistics before. And so when you talk about the
different income brackets,
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there's probably much more of a
reliance on Social Security as a component of support in your
retirement years for lower-
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income families than it is for
higher-income families. Exactly. So in general, as you
move up in the income
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distribution, people receive
higher benefits. But that slope, that relationship, is much less
pronounced than if you look at
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wealth in general. And because
there is much less inequality in Social Security benefits, adding
it to the— to the— to the bucket
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of the things that you consider
as wealth totally changes the picture that you— that you have
when you trace the level of
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inequality over time. So then, with everything we've
seen, especially in recent
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years, how then do we value
Social Security benefits right now? And I guess maybe even more
importantly, how, potentially,
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might we value them in the
future? Because obviously, there are so many questions about what
Social Security might be in the
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next decade or so. Right. So that's— that's an
important consideration. So we
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have known for decades that at
some point during the— around the year 2033 or 2035— this date
has moved a little bit. At some
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point, the Social Security Trust
Fund, which has the reserves of the Social Security system, is
going to run out of money. When
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this happens, Social Security
will not be able to pay the benefit in full. Based on the
current estimate, it will be
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able to pay 75% of the benefits.
So at this point, there will need to be a reform. Either you
will have to raise the level of
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payroll taxes that form Social
Security, or you will have to lower the benefits or to move
the retirement age. Now, in our—
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in our paper, we take this into
account. We have some— some tests like— what if, like, we pay the
benefit in full, what if we cut
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them by 20%. And we look at how
it changes the trends in wealth inequality. But you have to
remember that this is not news.
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This we have known, if you look
at the Social Security reports that, like, the Social Security
Administration publishes every
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year about the health of the
system, we have known that for decades. And so that was, in a
sense, already known, 40 years
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ago. And so it doesn't change
the trends that much. But the concept of inequality,
though, has probably shifted
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over the last few decades as
well. So what do you mean by this? Well, I mean, when you
think about the impact of the
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inequality because of how Social
Security has changed, we're seeing probably a much greater
impact on inequality than we
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have in the past.
- Right. Right. And so there are several
reasons for that. So one is that
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you have many more workers that
are, like, well-covered by Social Security, or, like, young
retirees, than 40 years ago.
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Second, life expectancy has
increased. So it has stagnated a little bit in— in more recent
years. But over, like, a long
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period, it has increased. And,
like, the third thing, which— which is, I think, the more
interesting point, I think, from
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a finance point of view, is that
the level of interest rate has declined enormously. And so when
you try to buy an annuity from
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an insurance, for example, the
level of the interest rate is going to affect the value of
this annuity. The lower the
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interest rates, the higher the
value of the— of the assets, such as Social Security— future Social
Security benefits.
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Well, and even that level of
interest rate, as you kind of alluded to, has shifted, what,
over the last 30 years or so. We
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went for such a long period of
time with interest rates basically at zero. Then we saw
that rise in and around the
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pandemic. And we still are
seeing a higher rate of inflation than we saw, say—
- Right. - 20 years ago. So—
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so what really matters here is a
level of real interest rates. That is a difference between the
level of nominal interest rates
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That, like, you would see on a
mortgage contract, and the level of inflation. Because Social
Security benefits are indexed on
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inflation. So when— when— when—
when inflation goes up, it doesn't really hurt retirees as
much as it hurts the rest of the
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population, because they are
protected against it. Now, the spread between the nominal
interest rate and inflation is
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still very low relative to what
it was in the '80s. We've obviously had a lot of
policy discussion around Social
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Security, especially lately. One
of the things, obviously, that the current administration
brought forward was not taxing
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Social Security benefits. All of
these kind of ideas kind of filter into the mix as to that
component of inequality and
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Social Security benefits.
- Yeah, this kind of policy has big
redistribution effects,
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especially not so much between
rich and poor people, but more so between different
generations. So for example, if
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like— cutting what they call the
Social Security tax is effectively increasing the
Social Security benefits. Now
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there is no free lunch. Like,
Social Security benefits in a pay- as-you-go retirement system, are
paid by workers. And so if you
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decide that the current courts of
retirees will receive more benefits, that means that the
deal is mechanically getting
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worse for younger generations.
And so that's where— that's the dimension on which the
redistribution along this kind
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of policy operates. It's between
generations. - And it's not a component of wealth
that's transferable to that next
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generation as well.
- Well, I mean, that's a choice for, like,
your parents or your
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grandparents. If they decide that
these additional benefits are like not having to pay the tax
on Social Security taxes.
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Because just to be clear, the
Social Security tax is not going to the federal government. It
feeds back into the Social
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Security Trust Fund.
- Right. And so it's
it's really like— I think the
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right way to think about it is
an increase in benefits. - Right. And so if your parents that are
currently retired decide to save
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that money instead of spending
it, then you as an individual, you would get it back for
inheritance. - Right. - Now, not all
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Americans are equally situated
on— on that dimension. Because, first of all, like, that Social
Security tax is only going to go
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to— towards, like, high-income
Social Security recipients. - Right. - And so effectively, what
would happen is that you would
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have like— like, current workers
whose parents have low Social Security benefits. So for them,
it means that they will have to
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fund that increase in generosity
for current retirees, but their parents will not be able to save
that money to return it to them
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in the form of inheritance. So
yes, it's a transfer from, like, young generations to older
generation. And potentially that
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transfer is kind of like offset
by the inheritance mechanism, but not equally for all young
Americans.
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I found it interesting in
reading through the paper, and you mentioned this a little bit
earlier— is the impact, or lack
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thereof, of this component of
Social Security benefits to inequality on the top 10%. Take
us through why that's so
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important to this paper. So because— because,
essentially, when you look at the bottom 90%— so the rest of
the population, for them, Social
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Security is more or less half
their wealth. Whereas for the top 10%, it's much smaller. And
for the top 1%, it's like,
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totally insignificant. - Right.
- And therefore, when you ignore Social Security, you kind of
like totally overlook the
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biggest chunk of wealth that the
bottom 90% has, and you fully count the wealth of the top 10%.
Which is why including it really
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changes the picture.
- I found it interesting. You also
mentioned at the end of the paper,
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we're still kind of at a point
where there's probably a lot more research to do in terms of
looking into this and these
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impacts as we move forward,
correct? Right. Because, like, our paper
is mostly, in a sense, an
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accounting paper. We are just
trying to measure how much wealth people have. - Right. - So
it's not— it's not a measure of,
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like, the causal effect of
Social Security on the distribution of wealth. Because
if Social Security did not
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exist, the behavior of people
would like totally change. Presumably, people, knowing that—
so wages, net wages, would be
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higher because you wouldn't have
to pay the Social Security tax. And there is a question of what
people would do with the money.
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Would they have saved more privately,
or would they have— would they have chosen to consume it? And so
depending on the assumptions
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that you are making here, the
causal effect of Social Security on wealth inequality could be
very different. So our paper is
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just measuring things. It's just
trying to get the accounting right, but it doesn't really
tell you what Social Security is
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actually doing in terms of
affecting inequality. - Is there, though, a natural next
area that you would like to
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build off of this research to go
look at next? Right. So as you— as you
mentioned, one big source of
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concern for the next 10 years is
this funding gap. And as I alluded to, there are several
ways to solve that gap. Now,
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whether you solve it by reducing
the benefit, changing the retirement age, or by increasing
taxes, that does not affect all
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Americans in the same way. And
since it's a big fraction of their wealth, the actual policy
decisions will have a big effect
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on the way the cost, the burden,
is, like, distributed among Americans. So that's, like,
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something that we are trying to
do right now. And so that puts, as you kind of
alluded to— that puts more
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emphasis on what's going to
happen on the policy side. - Yes. - Over the next decade, to truly
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understand the path
that we're gonna see. - Right. Once you get the accounting
right, you can think of— okay,
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if I change the rule, who gets
affected? Who benefits? Well, most of like— in net, it's going to
be a burden, because there is
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this money that is— that is—
that is just missing. - Yeah. But like, depending on the policy
choice that you make to address
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this problem, the— who is going
to be affected, in terms of which cohort— and we mean a
cohort, whether it's high-income
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people or low-income people—
that really depends on the way we decide to solve that problem.
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Is there enough of an understanding
by the policymakers about the accounting side, so they can make
the proper decisions on the
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policy side?
- So in a sense, that's what we are
trying to provide in our future
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research. I think a lot of
policymakers know about this. Now, I think the problem is that
Social Security has been
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described as like the third rail
of American politics. - Yes. And so as long as long the trust fund
still has money, in a sense, I
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don't think any of them will say
anything about this, because it's just like— there is only,
like, political cost. But we know
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that like— so we are in '25. So in
eight years, I think, based on the latest estimate—
- Yeah.
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there won't be any money left.
And so at that point, policy makers
will have to say, "Okay, we
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prefer to raise the retirement
age, or we prefer to cut the benefit, or we prefer to raise
the taxes."
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Those are going to be
our choices. Sylvain, great to see you again.
Thank you very much. Thank you.
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Thank you for having me.
- Thank you. Sylvain Catherine, who is Assistant Professor of Finance
here at the Wharton School.
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- Thank you for listening to
<i>The Ripple Effect</i>. We hope you found
00:14:46
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