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Social security and unsecured debt

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  • Hurst, Erik
  • Willen, Paul

Abstract

Most young households simultaneously hold both unsecured debt on which they pay an average of 10 percent interest and social security wealth on which they earn less than 2 percent. We document this fact using data from the Panel Study of Income Dynamics. We then consider a life-cycle model with “tempted” households, who find it impossible to commit to an optimal consumption plan and “disciplined” households who have no such problem, and we explore ways to reduce this inefficiency. We show that allowing households to use social security wealth to pay off debt while exempting young households from social security contributions (but in both cases requiring higher contributions later) leads to increases in welfare for both types of households and, for disciplined households, to significant increases in consumption and saving and reductions in debt.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 91 (2007)
Issue (Month): 7-8 (August)
Pages: 1273-1297

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Handle: RePEc:eee:pubeco:v:91:y:2007:i:7-8:p:1273-1297

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Web page: http://www.elsevier.com/locate/inca/505578

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Citations

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Cited by:
  1. Alisdair McKay, 2013. "Online Appendix to "Search for Financial Returns and Social Security Privatization"," Technical Appendices 12-80, Review of Economic Dynamics.
  2. Gahramanov, Emin, 2013. "Survival misperception, time inconsistency, and implications for life-cycle saving and welfare," Economic Modelling, Elsevier, vol. 32(C), pages 539-550.
  3. Hurst, Erik & Willen, Paul, 2007. "Social security and unsecured debt," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1273-1297, August.
  4. Laitner, John & Silverman, Dan, 2012. "Consumption, retirement and social security: Evaluating the efficiency of reform that encourages longer careers," Journal of Public Economics, Elsevier, vol. 96(7-8), pages 615-634.
  5. Roel M. W. J. Beetsma & Alessandro Bucciol, 2010. "Differentiating Indexation in Dutch Pension Funds," CESifo Working Paper Series 3305, CESifo Group Munich.
  6. repec:dgr:uvatin:2010128 is not listed on IDEAS
  7. Hans Fehr & Fabian Kindermann, 2009. "Pension funding and individual accounts in economies with life-cyclers and myopes," Working Papers 2009/23, Institut d'Economia de Barcelona (IEB).
  8. Ajello, Andrea, 2010. "Financial intermediation, investment dynamics and business cycle fluctuations," MPRA Paper 32447, University Library of Munich, Germany, revised Mar 2011.
  9. Alan D. Viard, 2007. "The Welfare Effects Of Pay-As-You-Go Retirement Programs: The Role Of Tax And Benefit Timing," Contemporary Economic Policy, Western Economic Association International, vol. 25(2), pages 282-292, 04.
  10. Frank Caliendo & Emin Gahramanov, 2013. "Myopia and pensions in general equilibrium," Journal of Economics and Finance, Springer, vol. 37(3), pages 375-401, July.
  11. T. Findley & Frank Caliendo, 2009. "Short horizons, time inconsistency, and optimal social security," International Tax and Public Finance, Springer, vol. 16(4), pages 487-513, August.
  12. Alisdair McKay, 2011. "Household Saving Behavior and Social Security Privatization," Boston University - Department of Economics - Working Papers Series WP2011-027, Boston University - Department of Economics.
  13. John Gathergood & Joerg Weber, 2012. "Self-Control, Financial Literacy and Co-Holding Puzzle," Discussion Papers 2012-02, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  14. Alessandro Bucciol, 2006. "The Roles of Temptation and Social Security in Explaining Individual Behavior," "Marco Fanno" Working Papers 0032, Dipartimento di Scienze Economiche "Marco Fanno".
  15. Athreya, Kartik B., 2008. "Default, insurance, and debt over the life-cycle," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 752-774, May.

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