Borrowing Constraints and their Implications for Social Security

Shantanu Bagchi
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Shantanu Bagchi: Department of Economics, Towson University

No 2026-04, Working Papers from Towson University, Department of Economics

Abstract: This paper uses a stylized overlapping-generations model to examine the effect of borrowing constraints on the economic implications of Social Security. In this framework, Social Security provides partial insurance against income risk that is uninsured due to incomplete markets. I find that when borrowing consistent with life cycle behavior is allowed in this framework, the micro- and macroeconomic effects of a downsizing in Social Security are considerably smaller than when borrowing is prohibited. I also find that the key mechanism behind this result is labor supply: with endogenous borrowing, households are able to exploit increasing labor productivity in early life to better self-insure against income risk.

Keywords: Social Security; Borrowing constraint; Incomplete markets; Partial insurance; Labor supply. (search for similar items in EconPapers)
JEL-codes: E21 G51 H55 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2026-03, Revised 2026-03
New Economics Papers: this item is included in nep-age and nep-dge
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