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Hunting the Unobservables for Optimal Social Security: A General Equilibrium Approach

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Abstract

We study the optimal size of a pay-as-you-go social security program for an economy composed of both permanent-income and hand-to-mouth consumers. While previous work on this topic is framed within a two-period partial equilibrium setup, we study this issue in a life-cycle general equilibrium model. Because this type of welfare analysis depends critically on unobservable prefer- ence parameters, we methodically consider all parameterizations of the unobservables that are both feasible and reasonable— all parameterizations that can mimic key features of macro data (feasible) while still being consistent with micro evidence and convention (reasonable). The model predicts that the optimal tax rate is between 6 percent and 15 percent of wage income.

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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2008_10eco.pdf
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Bibliographic Info

Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number 2008_10.

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Length: 17 pages
Date of creation: 19 Oct 2008
Date of revision:
Handle: RePEc:dkn:econwp:eco_2008_10

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Related research

Keywords: Optimal Social Security; Unobservable Preference Parameters; General Equilibrium Calibration; Permanent Income; Hand to Mouth;

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References

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  1. Martin Feldstein, 1982. "The Optimal Level of Social Security Benefits," NBER Working Papers 0970, National Bureau of Economic Research, Inc.
  2. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 2001. "What Accounts for the Variation in Retirement Wealth among U.S. Households?," American Economic Review, American Economic Association, vol. 91(4), pages 832-857, September.
  3. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 2000. "Time inconsistent preferences and Social Security," Discussion Paper / Institute for Empirical Macroeconomics 136, Federal Reserve Bank of Minneapolis.
  4. Bullard, James & Feigenbaum, James, 2007. "A leisurely reading of the life-cycle consumption data," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2305-2320, November.
  5. John Ameriks & Andrew Caplin & John Leahy, 2007. "Retirement Consumption: Insights from a Survey," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 265-274, May.
  6. Kevin X.D. Huang & Frank Caliendo, 2007. "Rationalizing Seven Consumption-Saving Puzzles in a Unified Framework," Vanderbilt University Department of Economics Working Papers 0716, Vanderbilt University Department of Economics.
  7. Docquier, Frederic, 2002. "On the optimality of public pensions in an economy with life-cyclers and myopes," Journal of Economic Behavior & Organization, Elsevier, vol. 47(1), pages 121-140, January.
  8. Feigenbaum, James, 2008. "Can mortality risk explain the consumption hump?," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 844-872, September.
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Cited by:
  1. Frank N. Caliendo, 2009. "Is Social Security behind the Collapse of Personal Saving?," CESifo Working Paper Series 2746, CESifo Group Munich.
  2. Frank Caliendo & Emin Gahramanov, 2013. "Myopia and pensions in general equilibrium," Journal of Economics and Finance, Springer, vol. 37(3), pages 375-401, July.
  3. Frank Caliendo & T. Findley, 2013. "Limited computational ability and social security," International Tax and Public Finance, Springer, vol. 20(3), pages 414-433, June.
  4. Emin Gahramanov & Xueli Tang, 2014. "Impatient in Experiments, but Patient in Simulations: A Challenge to a Neoclassical Model," Economics Series 2014_2, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  5. T. Findley & Frank Caliendo, 2008. "The behavioral justification for public pensions: a survey," Journal of Economics and Finance, Springer, vol. 32(4), pages 409-425, October.

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