Panel Paper: Validating Longitudinal Earnings In Dynamic Microsimulation Models: The Role of Outliers

Friday, November 9, 2012 : 8:00 AM
Poe (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Melissa Favreault, The Urban Institute and Owen Haaga, Urban Institute

Rapid growth in the earnings of the highest earners over the past two and a half decades has contributed to strains on Social Security’s finances and made econometric representation of lifetime earnings on a year-by-year basis—already an extremely complicated technical problem—even more challenging. This project uses various descriptive techniques and high-quality data from administrative earnings records—including records matched to household surveys—to explore three related questions about this aspect of the changing wage distribution. What were the longitudinal characteristics of earnings histories for high earners from 1983 through 2007? How well does SSA’s MINT6 microsimulation model project skewness in the earnings distribution and long-term characteristics of earnings paths, especially for the highest earners? How does earnings skewness affect Social Security benefit distributions under current law? Answers to these questions are important to understand how Social Security costs and adequacy are evolving. They also help ensure reliable dynamic microsimulation projections of Social Security benefits and taxes under current law and proposed changes to the program, such as uncapping the contribution and benefit base or imposing surtaxes on earnings beyond certain thresholds.