Social security is NOT a substitute for annuity markets

Frank N. Caliendo, Nick L. Guo, Roozbeh Hosseini

Research output: Contribution to journalArticle

13 Citations (Scopus)

Abstract

Common wisdom suggests that a fully-funded actuarially fair social security system should 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 longevity insurance role of social security, and we show that under certain 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. At the same time it crowds out bequests.

Original languageEnglish (US)
Pages (from-to)739-755
Number of pages17
JournalReview of Economic Dynamics
Volume17
Issue number4
DOIs
StatePublished - Oct 1 2014

Fingerprint

Substitute
Annuities
Social security
Bequests
Wisdom
General equilibrium
Crowd-out
Life annuities
Household
National income
Cost-benefit analysis
Costs
Insurance
Income
Household welfare
Benefit analysis
Factor prices
Social security system
Longevity risk

Keywords

  • Annuities
  • Bequest income
  • General equilibrium
  • Social security
  • Uninsurable longevity risk

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Social security is NOT a substitute for annuity markets. / Caliendo, Frank N.; Guo, Nick L.; Hosseini, Roozbeh.

In: Review of Economic Dynamics, Vol. 17, No. 4, 01.10.2014, p. 739-755.

Research output: Contribution to journalArticle

Caliendo, Frank N. ; Guo, Nick L. ; Hosseini, Roozbeh. / Social security is NOT a substitute for annuity markets. In: Review of Economic Dynamics. 2014 ; Vol. 17, No. 4. pp. 739-755.
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