How Does Differential Mortality Affect Social Security Progressivity and System Finances?

John E. Sabelhaus, Congressional Budget Office (CBO)

The Social Security system is facing an impending financial crisis as the baby boom cohorts approach retirement. A reform proposal put forth by Diamond and Orzag (2004) identifies mortality differences by income as a significant contributor to the system’s financial imbalance. Although the program redistributes income from high-earning households to low-earning households, largely through a progressive benefit formula, differential mortality patterns may erode much of this progressivity when examined from a “money’s worth” perspective. When aggregated, these micro-level progressivity effects translate into macro-level system finance effects. Individuals collecting higher benefits for longer periods of time because of mortality patterns will negatively impact the financial balance of the Social Security system. Using the Congressional Budget Office’s Long-Term (CBOLT) model, a microsimulation model with stochastic capabilities, this paper examines the degree to which differential mortality reduces progressivity in Social Security and the effect differential mortality patterns have on system finances.