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Labor Supply and the Optimality of Social Security

Shantanu Bagchi ()

No 2014-04, Working Papers from Towson University, Department of Economics

Abstract: Traditional economic theory predicts that unfunded social security can be justified on the basis of its ability to efficiently finance retirement, and also for its ability to provide insurance against mortality risk and uninsurable shocks to labor income. In this paper, I demonstrate that the quantitative importance of the traditional roles of social security depends on how household labor supply responds to social security. I build a calibrated general-equilibrium model where social security has a large welfare-improving role, and I show that the distortionary effect on households' labor hours erases virtually all the welfare gains from social security. I also find that this result is robust within the range of labor supply elasticities usually encountered in the macroeconomic literature..

Keywords: Labor supply; Social security; Mortality risk; Productivity shock; Insurance; Elasticity. (search for similar items in EconPapers)
JEL-codes: E21 H55 J22 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2014-09, Revised 2014-09
New Economics Papers: this item is included in nep-age, nep-dge, nep-ger, nep-ias and nep-mac
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Journal Article: Labor supply and the optimality of Social Security (2015) Downloads
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