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Consumption, Retirement, and Social Security: Evaluating the Efficiency of Reform with a Life-Cycle Model

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  • John Laitner

    (University of Michigan)

  • Daniel Silverman

    (University of Michigan)

Abstract

This paper analyzes the effect of a potential reform to the Social Security system on individuals’ retirement and consumption choices. We first estimate the coefficients for a life-cycle model. We assume intratemporally nonseparable preference orderings and endogenous retirement. Our framework allows the possibility of disability. The specification predicts a change in consumption at retirement; we use the empirical magnitude of the change, together with desired retirement age, to identify key parameters such as the curvature of the utility function. We then qualitatively and quantitatively study the possible long-run effect of a Social Security reform in which individuals no longer face the OASI payroll tax after some specified age, and their subsequent earnings have no bearing on their Social Security benefits. Simulations indicate that retirement ages would rise by as much as one year, equivalent variations could average $5000 (1984 dollars) per household or more, and reform could generate $2500 or more additional income tax revenue per household.

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Bibliographic Info

Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp142.

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Length: 44 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:mrr:papers:wp142

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Cited by:
  1. Hugo Benítez-Silva & J. Ignacio García-Pérez & Sergi Jiménez-Martín, 2011. "The effects of employment uncertainty and wealth shocks on the labor supply and claiming behavior of older American workers," Economics Working Papers 1275, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Christopher House & John Laitner & Dmitriy Stolyarov, 2006. "Home Production by Dual Earner Couples and Consumption During Retirement," Working Papers wp143, University of Michigan, Michigan Retirement Research Center.
  3. Gopi Shah Goda & John B. Shoven & Sita Nataraj Slavov, 2010. "Implicit Taxes on Work from Social Security and Medicare," NBER Chapters, in: Tax Policy and the Economy, Volume 25, pages 69-88 National Bureau of Economic Research, Inc.
  4. Francesc Ortega & Libertad González & Lídia Farré Olalla, 2009. "Immigration, family responsibilities and the labor supply of skilled native women," Working Papers. Serie AD 2009-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  5. Michael Hurd & Pierre-Carl Michaud & Susann Rohwedder, 2008. "Using International Micro Data to Learn about Individuals' Responses to Changes in Social Insurance," Working Papers 626, RAND Corporation Publications Department.
  6. Christopher House & John Laitner & Dmitriy Stolyarov, 2007. "Trends in the Labor Force Participation of Married Women," Working Papers wp171, University of Michigan, Michigan Retirement Research Center.

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