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Social Security is NOT a Substitute for Annuity Markets

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  • Frank Caliendo

    (Utah State University)

  • Nick Guo

    (University of Wisconsin-Whitewater)

  • Roozbeh Hosseini

    (Arizona State University)

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. (Copyright: Elsevier)

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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

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Handle: RePEc:red:issued:13-126

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Keywords: Annuities; Uninsurable longevity risk; Social security; General equilibrium; Bequest income;

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  1. Davies, James B, 1981. "Uncertain Lifetime, Consumption, and Dissaving in Retirement," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(3), pages 561-77, June.
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Cited by:
  1. Bagchi, Shantanu, 2013. "Is the Social Security Crisis Really as Bad as We Think?," MPRA Paper 56294, University Library of Munich, Germany, revised May 2014.

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