DP2456 | The US Social Security: A Financial Appraisal For The Median Voter


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Why do voters support PAYG social security systems? Browning (1975) suggested that for a majority of voters, who consider past contributions as a sunk cost, unfunded systems may represent a better investment than alternative assets, such as mutual or pension funds. I quantify the relevance of Browning's argument by analysing the performance of the US social security system as an asset. For different specifications of the median voter's household at US Presidential elections from 1964 to 1996, I calculate the return from 'investing' in social security, i.e. the rate of discount that equalizes the expected present value of current and future contributions with the expected present value of pension benefits. For the baseline family, the returns fluctuate between 5.7% in 1984 - with a 43 year old median voter - and 9.8% in 1964 - 46 year old median voter - and is therefore in line with the average US stock market return over the last century: 6.6% for the S&P Composite. In particular, social security outperforms both S&P Composite and Dow Jones Industrial Average in ex-post returns for the median voters at the 1964 and 1968 elections, this difference vanishes in the 1972 election, and it is reversed in the 1976 election.