Explore the Costs and Benefits of Social Security Reforms
Glossary
Explore the Costs and Benefits of Social Security Reforms
Glossary
The age at which individuals are eligible for full Social Security benefits.
Reforms AN1–AN3 increase the NRA from 65 to 66, 67, and 68.
Reforms increasing the NRA reduce benefits at earlier ages and can discourage early retirement, but often lower overall welfare.
These two measures are used to quantify how a policy reform affects individual well-being (welfare), expressed in intuitive terms:
CE Welfare: A way to measure the change in an individual's well-being due to a policy change, expressed as the percentage change in lifetime consumption that would make them feel equally well-off.
LE Welfare: A similar concept, but expressed as the equivalent change in leisure time instead of consumption.
Both measures allow welfare comparisons across different policy reforms using a consistent and interpretable scale.
Average Indexed Monthly Earnings (AIME)
A measure of an individual's average monthly earnings from their highest-earning years adjusted for wage inflation, and serves as the basis for calculating Social Security retirement benefits.
Primary Insurance Amount (PIA)
The PIA is the monthly benefit a person receives if they claim Social Security at the Normal Retirement Age (NRA).
It is calculated using a piecewise formula that applies different replacement rates to three income brackets based on AIME:
First bracket: highest replacement rate (e.g., 91%)
Second bracket: moderate rate (e.g., 32%)
Third bracket: lowest rate (e.g., 15%)
The result is a progressive benefit schedule that favors lower earners.
Budgetary Effects
Direct Budgetary Effect: The immediate, first-order cost or revenue change to the government from a policy, without considering behavioral responses (for example: change in total retirement benefits paid out...).
Indirect Budgetary Effect: Changes in government revenue or spending that occur because individuals change their behavior in response to the policy ( for example: changes in income tax collected due to more or less work).
Net effect: Combined fiscal effect, used in MVPF calculations.
WTP measures the welfare gain from a policy reform, expressed as a percentage of lifetime consumption. It quantifies how much individuals would be willing to sacrifice in consumption to implement a given reform.
The MVPF measures how much welfare is generated per dollar of net government spending.
It is defined as the ratio of the willingness-to-pay (WTP) to the net cost to the government:
MVPF = WTP / Net Government Cost
MVPF > 1: Welfare gain exceeds fiscal cost. it is a high "bang for the buck."
MVPF = 1: Welfare gain equals fiscal cost.
MVPF < 1: Welfare gain is smaller than the cost.
MVPF = ∞: Reform increases welfare and reduces government net cost . It "pays for itself".
These reforms change the Social Security benefit formula by increasing the replacement rates especially for lower earners.
Social Security benefits are calculated by applying different replacement rates to three income ranges based on a person's AIME:
P1.1–P1.9: Raise the rate for the first (lowest) income range.
P2.0–P2.9: Raise the rate for the second (middle) income range.
P3.0–P3.9: Raise the rate for the third (highest) income range.
Uniform increases to Social Security benefit levels across all income brackets.
A percentage increase in Social Security benefits for each year of delayed claiming beyond the NRA.
Reforms AD1–AD5 increase the DRC from 8% to 10%.
Increase both the early claiming penalty and delayed retirement credit symmetrically
Expansion of government-funded healthcare coverage after age 65.
Medicare Part A Reform: This reform increases the extent of coverage provided by Medicare Part A (primarily for hospital-related services) for all individuals aged 65 and over.
Medicare Part B Reform: This reform increases the extent of coverage provided by Medicare Part B (primarily for doctor visits and outpatient services) specifically for individuals aged 65+ who are not participating in the labor force (as active workers might have other insurance).
These reforms usually improve welfare but reduce older-age participation.
Reductions in income tax rates after age 62.
These policies increase participation and welfare but have relatively high costs
Policies that increase the net return on savings
These reforms improve welfare but may reduce participation at older ages due to stronger income effects.