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

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Author Info
Frank N. Caliendo () (Utah State University)
Emin Gahramanov () (Deakin University)
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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Publisher 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;

Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

References listed on IDEAS
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  1. Feldstein, Martin S, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 303-20, May. [Downloadable!] (restricted)
    Other versions:
  2. 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. [Downloadable!] (restricted)
  3. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 2003. "Time-Inconsistent Preferences And Social Security," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 745-784, May. [Downloadable!] (restricted)
    Other versions:
  4. 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, 03. [Downloadable!] (restricted)
    Other versions:
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