Retirement, Family Insurance, and Social Insurance: Evidence from the Great Depression and the Introduction of Social Security

Project Outcomes Statement

More than one-third of the US federal budget is devoted to social insurance programs for the elderly, through Social Security, Medicare, and much of the Medicaid program. These programs have the potential to affect economies and societies in profound ways. Better understanding the effects of these programs is therefore one of the most important challenges for research in economics, and it has become increasingly urgent as various demographic and economic changes are straining government budgets and triggering calls for reforms to major social insurance programs such as Medicare and Social Security. Unfortunately, learning about the effects of these programs has been hindered by one of their main features that makes these programs so important – their near-universal coverage – and by one consequence of their importance – the gradual, incremental way in which they are typically reformed.

In this project, we contribute to a deeper understanding of the effects of major government social insurance programs by investigating the effects of some of the most important present-day social insurance programs around the time of their creation in the late 1930s. This setting offers two major advantages relative to more recent settings: much greater policy variation and the availability of detailed data on the full US population from recently digitized complete-count US Census data files. We use the advantages of this setting to better understand two key dimensions of the overall costs and benefits of these programs: the direct effects on the beneficiaries themselves and the indirect effects on beneficiaries’ children and families.

In terms of the direct effects on the beneficiaries themselves, we find that the Old Age Assistance (OAA) program – a state-administered program introduced alongside Social Security in the 1930s and the largest source of government old-age support until the 1950s – significantly reduced beneficiaries’ labor supply. Although large behavioral responses of this kind can sometimes signal a large gap between the cost to the government and the value to beneficiaries, our analysis suggests that beneficiaries valued the program highly, at close to the government’s cost of providing it. These and related findings are reported in our published article, “Government Old-Age Support and Labor Supply: Evidence from the Old Age Assistance Program,” American Economic Review, vol. 108(8), pages 2174-2211, August 2018.

An important question is what policy changes enabled expanded government old-age support in the 1930s. In sole-authored work, Fetter found that a critical element of increasing government old-age support in the 1930s was a reduction in the role of local government in funding responsibility for assistance to the needy, along with a corresponding increase in the funding role of state governments and the federal government. In addition to deepening our understanding of fiscal federalism in the New Deal, this analysis establishes the importance of statutory variation in explaining observed variation in old-age support in the 1930s, which may prove useful in future analyses of OAA. This paper was published as “Local Government and Old-Age Support in the New Deal,” Explorations in Economic History, vol. 66, pages 1-20, October 2017.

In terms of the indirect effects on beneficiaries’ children and families, in ongoing work-in-progress we are investigating effects of OAA and Social Security on the later-life outcomes of the children of early recipients. Our preliminary results suggest that Social Security had important effects on intergenerational co-residence, migration, and labor market outcomes of recipients’ children. This highlights a potentially important, under-appreciated effect of Social Security operating through intergenerational linkages within families. Our work in progress, “The Intergenerational Incidence of Government Old-Age Support: Evidence from the Early Social Security Era,” is co-authored with Paul Mohnen and has been presented in preliminary form to various academic audiences.

A central component of our project was mentoring junior researchers. In the course of this project we have worked with two undergraduate research assistants, a pre-doctoral research assistant, and four graduate research assistants. This has allowed them to get hands-on experience with economics research and develop skills that will be useful to them in their own research and lives. One of our former research assistants, Paul Mohnen, is now a coauthor on our ongoing work. We have maintained ongoing advising relationships with our past research assistants as well.