The Insurance Role of Social Security: Theory and Lessons for Policy Reform

September 1, 1997

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the impact of social security on welfare. The provision of social security reduces precautionary savings and encourages early retirement. Consequently, it lowers aggregate capital, employment, output, and consumption. On the other hand, it also provides old age insurance. This trade-off is examined using a life-cycle general equilibrium model. The paper finds that the current U.S. Social Security system can improve welfare even though the levels of aggregate output, employment, capital, and consumption fall relative to their levels without such a system. The welfare gains arise from insurance against living much longer than expected.

Subject: Aging, Consumption, Financial institutions, Insurance, Labor, National accounts, Population and demographics, Retirement, Securities

Keywords: adverse selection, Aging, Computable General Equilibrium, Consumption, consumption decision rule, early retirement, earnings profile, impact of Social Security, Insurance, insurance value, Public Finance, Retirement, Securities, Social Security, Social Security benefit, welfare gain, WP

Pages:
49
Volume:
1997
DOI:
https://doi.org/10.5089/9781451944174.001
Issue:
113
Series:
Working Paper No. 1997/113
Stock No:
WPIEA1131997
ISBN:
9781451944174
ISSN:
1018-5941

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