IS THE SOCIAL SECURITY CRISIS REALLY AS BAD AS WE THINK?

Shantanu Bagchi

Macroeconomic Dynamics, 2016, vol. 20, issue 3, 737-776

Abstract: Because they ignore the household-level and macroeconomic adjustments associated with longevity improvements, the actuarial projections of the Social Security Administration overestimate the Social Security crisis. Using a general-equilibrium model with heterogeneous households and incomplete markets, I show that with these adjustments accounted for, a significantly smaller decline in benefits is needed to balance the Social Security budget. Households respond by delaying retirement and Social Security benefit collection, by working more hours, and by also saving more. In general equilibrium, these effects lead to a natural expansion of Social Security's tax base and generate significant delayed retirement credits, which the actuarial estimates completely overlook.

Date: 2016
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Working Paper: Is the Social Security Crisis Really as Bad as We Think? (2014)
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