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Social Security and unsecured debt

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Author Info
Erik Hurst
Paul Willen

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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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Paper provided by Federal Reserve Bank of Boston in its series Public Policy Discussion Paper with number 04-10.

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Date of creation: 2004
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Handle: RePEc:fip:fedbpp:04-10

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Keywords: Social security Debt relief

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  31. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2004. "Are Americans Saving "Optimally" for Retirement?," NBER Working Papers 10260, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  32. John Geanakoplos & Olivia S. Mitchell & Stephen P. Zeldes, . "Social Security Money's Worth," Pension Research Council Working Papers 97-20, Wharton School Pension Research Council, University of Pennsylvania.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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". [Downloadable!]
  2. Alan D. Viard, 2006. "The welfare effects of pay-as-you-go retirement programs: the role of tax and benefit timing," Working Papers 0602, Federal Reserve Bank of Dallas. [Downloadable!]
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