Health Risk and the Welfare Effects of Social Security

Shantanu Bagchi () and Juergen Jung
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Shantanu Bagchi: Department of Economics, Towson University

No 2020-02, Working Papers from Towson University, Department of Economics

Abstract: We quantify the importance of idiosyncratic health risk in a calibrated general-equilibrium model of Social Security. We construct an overlapping-generations model with rational-expectations households, idiosyncratic labor income and health risk, profit-maximizing firms, incomplete insurance markets, and a government that provides pensions and health insurance. We calibrate this model to the U.S. economy and perform two sets of computational experiments: (i) we decrease the size of Social Security, and (ii) we modify the progressivity of Social Security's benefit-earnings rule. We find that cutting Social Security's payroll tax in general equilibrium increases overall welfare, but by a lesser extent when health risk is present. When we modify the progressivity of Social Security's benefit-earnings rule, we find that a lump-sum benefit unrelated to past income increases overall welfare, but by a larger extent in the presence of health risk. A linear (fully proportional) benefit-earnings rule, on the other hand, reduces overall welfare, but also by a larger extent in the presence of health risk. Together, our results suggest that Social Security's implicit insurance is more valuable for low- and medium-income households when health risk is present in the model environment.

Keywords: Health risk; Social Security; benefit-earnings rule; consumption smoothing; general equilibrium. (search for similar items in EconPapers)
JEL-codes: E21 E62 H31 H55 I14 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2020-04, Revised 2022-07
New Economics Papers: this item is included in nep-age, nep-cmp, nep-dge, nep-hea, nep-ias, nep-lma, nep-mac and nep-pbe
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http://webapps.towson.edu/cbe/economics/workingpapers/2020-02.pdf First version, 2020 (application/pdf)

Related works:
Journal Article: Health risk and the welfare effects of Social Security (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:tow:wpaper:2020-02

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