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Social Security and Unsecured Debt

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  • Erik Hurst
  • Paul Willen

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 optimizing and rule-of-thumb' households and explore ways to reduce this inefficiency. We show that both allowing households to use social security wealth to pay off debt and exempting young households from social security contributions (but in both cases requiring higher contributions later later in life) leads to increases in welfare for both types of households and significant increases in consumption and saving, and reductions in debt, for optimizing households.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10282.

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Date of creation: Feb 2004
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Publication status: published as Hurst, Erik & Willen, Paul, 2007. "Social security and unsecured debt," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1273-1297, August.
Handle: RePEc:nbr:nberwo:10282

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Citations

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Cited by:
  1. repec:dgr:uvatin:2010128 is not listed on IDEAS
  2. Roel Beetsma & Alessandro Bucciol, 2010. "Differentiating Indexation in Dutch Pension Funds," Tinbergen Institute Discussion Papers 10-128/2, Tinbergen Institute.
  3. Laitner, John & Silverman, Dan, 2012. "Consumption, retirement and social security: Evaluating the efficiency of reform that encourages longer careers," Journal of Public Economics, Elsevier, vol. 96(7-8), pages 615-634.
  4. Guo, Nick L. & Caliendo, Frank N., 2014. "Time-inconsistent preferences and time-inconsistent policies," Journal of Mathematical Economics, Elsevier, vol. 51(C), pages 102-108.
  5. Alisdair McKay, 2013. "Online Appendix to "Search for Financial Returns and Social Security Privatization"," Technical Appendices 12-80, Review of Economic Dynamics.
  6. Erik Hurst & Paul Willen, 2004. "Social Security and unsecured debt," Public Policy Discussion Paper, Federal Reserve Bank of Boston 04-10, Federal Reserve Bank of Boston.
  7. Hans Fehr & Fabian Kindermann, 2009. "Pension Funding and Individual Accounts in Economies with Life-cyclers and Myopes," CESifo Working Paper Series 2724, CESifo Group Munich.
  8. John Gathergood & Joerg Weber, 2012. "Self-Control, Financial Literacy and Co-Holding Puzzle," Discussion Papers, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham 2012-02, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  9. Gahramanov, Emin, 2013. "Survival misperception, time inconsistency, and implications for life-cycle saving and welfare," Economic Modelling, Elsevier, vol. 32(C), pages 539-550.
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  11. 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.
  12. Alisdair McKay, 2011. "Household Saving Behavior and Social Security Privatization," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2011-027, Boston University - Department of Economics.
  13. Ajello, Andrea, 2010. "Financial intermediation, investment dynamics and business cycle fluctuations," MPRA Paper 32447, University Library of Munich, Germany, revised Mar 2011.
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  15. 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".
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