Social Security is NOT a Substitute for Annuities

Roozbeh Hosseini (), Lei (Nick) Guo and Frank Caliendo
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Lei (Nick) Guo: Jon M. Huntsman School of Business, Utah State University

No 680, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: Common wisdom suggests that a fully-funded actuarially fair social security system must increase welfare when households face longevity risk and annuity markets are missing. This wisdom is based on the observation that social security pays benefits as life annuities and therefore appears to complete the market. However, we argue that common wisdom is based on a benefit-only analysis that ignores a fundamental cost-- social security crowds out the bequests that households leave (and receive) in general equilibrium. We conduct a general equilibrium cost-benefit analysis of the insurance role of social security, and we show that under very general and empirically relevant conditions, this decline in bequest income offsets any possible gains from access to a public annuity pool. We abstract from distortions to national income and factor prices to show that the equilibrium bequest channel is all that is needed to reach this conclusion.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:680

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