The Transformation of the American Pension System: Was It Beneficial for Workers?

Preface

xiii Preface My work on retirement wealth and retirement adequacy was originally stimulated by two articles by Martin Feldstein (1974, 1976), which introduced the concept of Social Security wealth and developed its methodology, and considered the effects of Social Security wealth on the overall distribution of wealth. The latter paper was based on the 1962 Survey of Financial Characteristics of Consumers. My work up until that point focused on the inequality of household wealth, beginning with a 1980 paper using the socalled Measurement of Economic and Social Performance (MESP) database, a 1969 synthetic database on household wealth constructed from a statistical match of the 1970 Decennial Census Public Use Microdata Sample and the 1969 Internal Revenue Service Statistics of Income tax file. Feldstein (1976) found that the inclusion of Social Security wealth had a major effect on lowering the inequality of total household wealth (including Social Security wealth). The Gini coefficient—a measure of inequality that ranges from zero (complete equality) to one (total inequality)—for the sum of net worth and Social Security wealth among families in the age class 35–64 was 0.51, compared to a Gini coefficient of 0.72 for net worth. My first article in this area, Wolff (1987b), followed up Feldstein (1976) by examining the distributional implications of both Social Security and defined benefit private pension wealth. I was particularly interested in whether Feldstein’s results on the equalizing effects of Social Security wealth persisted when private pension wealth was also included. Did retirement wealth as a whole lower measured wealth inequality to the same degree that Feldstein found for just Social Security wealth? Wolff (1987b) used the 1969 MESP database. His was perhaps the first paper to add estimates of private pension wealth to standard household net worth and examine its effects on the overall distribution of wealth. The paper, like that of Feldstein (1976), showed that Social Security wealth had a pronounced equalizing effect on the distribution of augmented wealth (the sum of marketable wealth and retirement wealth). However, pension wealth had a disequalizing effect on augmented wealth. In particular, while the addition of Social Security wealth to net worth reduced the overall Gini coefficient from 0.73 to 0.48, the addition of pension wealth to the sum of net worth and Social Security wealth raised the Gini coefficient back to 0.66. The sum of Social Security and pension wealth had, on net, an equalizing effect on the distribution of augmented wealth but substantially less than did Social Security wealth alone. I also followed up this work with Wolff (1992), which provided Wolff.indb xiii Wolff.indb xiii 11/21/2011 9:16:43 AM 11/21/2011 9:16:43 AM xiv a discussion of some of the methodological issues involved in estimating both Social Security and pension wealth. In the early 1990s, I turned my attention to the redistributional effects of the Social Security system. Wolff (1993a,b), using the 1962 Survey of Financial Characteristics of Consumers and the 1983 Survey of Consumer Finances, examined the intra-cohort distributional effects of Social Security benefits relative to contributions into the Social Security system. The papers considered which groups were net gainers and which were net losers from the Social Security system as a whole. I first divided Social Security benefits into two components: 1) an annuity component, which is the benefit level that would be strictly determined by the person’s contributions into the Social Security system, and 2) the remainder, the transfer component. The transfer component, as its name indicates, is the additional benefit paid to retirees over and above the amount strictly justified as an annuity payment. The results indicated that the Social Security system is highly redistributive, paying out higher benefits relative to accumulated contributions for lower- than for upper-income families. Moreover, the paper also found that the transfer component of Social Security benefits fell over time, from an overall ratio of 0.85 in 1969 to 0.73 in 1973, and to 0.66 in 1983. After an almost decade-long hiatus, I returned to the issue of retirement wealth. In my presidential address to the Eastern Economics Association at its 2003 annual conference, held in New York, I called attention to the remarkable transformation of the American pension system. In particular, I reported on the rapid decline in pension coverage from traditional defined benefit plans and the equally stunning rise in coverage from newer defined contribution plans. My main focus was again...