Advanced Search
MyIDEAS: Login to save this paper or follow this series

Social Security and Unsecured Debt

Contents:

Author Info

  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w10282.pdf
Download Restriction: no

Bibliographic Info

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

as in new window
Length:
Date of creation: Feb 2004
Date of revision:
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

Note: AP PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2001. "Default and Punishment in General Equilibrium," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1304R5, Cowles Foundation for Research in Economics, Yale University, revised Mar 2004.
  2. John Geanakoplos & Olivia S. Mitchell & Stephen P. Zeldes, 1998. "Social Security Money's Worth," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1193, Cowles Foundation for Research in Economics, Yale University.
  3. Andrés Erosa & Martin Gervais, 1998. "Optimal Taxation in Life-Cycle Economies," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 9812, University of Western Ontario, Department of Economics.
  4. Juster, F. Thomas & Smith, James P. & Stafford, Frank, 1999. "The measurement and structure of household wealth," Labour Economics, Elsevier, Elsevier, vol. 6(2), pages 253-275, June.
  5. Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 2003. "Time-Inconsistent Preferences And Social Security," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(2), pages 745-784, May.
  6. George M. Constantinides & John B. Donaldson & Rajnish Mehra, . "Junior Can't borrow: A New Perspective on the Equity Premium Puzzle."," CRSP working papers 457, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  7. Steven J. Davis & Felix Kubler & Paul Willen, 2002. "Borrowing Costs and the Demand for Equity Over the Life Cycle," NBER Working Papers 9331, National Bureau of Economic Research, Inc.
  8. Martin Feldstein & Elena Ranguelova, 2001. "Individual Risk in an Investment-Based Social Security System," American Economic Review, American Economic Association, American Economic Association, vol. 91(4), pages 1116-1125, September.
  9. Hurst, Erik & Willen, Paul, 2007. "Social security and unsecured debt," Journal of Public Economics, Elsevier, Elsevier, vol. 91(7-8), pages 1273-1297, August.
  10. Alberto Bisin & Piero Gottardi, 1998. "Competitive Equilibria with Asymmetric Information," Levine's Working Paper Archive 2062, David K. Levine.
  11. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 149-185, February.
  12. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
  13. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 8(3), pages 275-298, December.
  14. Ricardo Reis, 2004. "Inattentive Consumers," Working Papers, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics. 135, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  15. John Y. Campbell, 1998. "Asset Prices, Consumption, and the Business Cycle," NBER Working Papers 6485, National Bureau of Economic Research, Inc.
  16. Thomas A. Durkin, 2000. "Credit cards: use and consumer attitudes, 1970-2000," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Sep, pages 623-634.
  17. Peter Diamond & John Geanakoplos, 2001. "Social Security Investment in Equities," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1314R, Cowles Foundation for Research in Economics, Yale University, revised Aug 2002.
  18. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2004. "Are Americans Saving "Optimally" for Retirement?," NBER Working Papers 10260, National Bureau of Economic Research, Inc.
  19. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 371-96, March.
  20. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self Control, Revealed Preferences and Consumption Choice," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 243-264, April.
  21. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, Springer, vol. 6(1), pages 83-114, June.
  22. Ranguelova, Elena & Feldstein, Martin, 2001. "Individual Risk in an Investment-Based Social Security System," Scholarly Articles 2797440, Harvard University Department of Economics.
  23. Jagadeesh Gokhale & Laurence J. Kotlikoff & Todd Neumann, 2001. "Does participating in a 401(k) raise your lifetime taxes?," Working Paper 0108, Federal Reserve Bank of Cleveland.
  24. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, Econometric Society, vol. 69(6), pages 1403-1435, November.
  25. John Y. Campbell & Joao F. Cocco & Francisco J. Gomes & Pascala J. Maenhout, 2000. "Investing Retirement Wealth? A Life-Cycle Model," Harvard Institute of Economic Research Working Papers 1896, Harvard - Institute of Economic Research.
  26. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  27. W. Pesendorfer & F. Gul, 1999. "Self-Control and the Theory of Consumption," Princeton Economic Theory Papers, Economics Department, Princeton University 99f2, Economics Department, Princeton University.
  28. Per Krusell & Anthony A. Smith, Jr., . "Consumption-Savings Decisions with Quasi-Geometric Discounting," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2001-05, Carnegie Mellon University, Tepper School of Business.
  29. Smetters, Kent & Walliser, Jan, 2004. "Opting out of social security," Journal of Public Economics, Elsevier, Elsevier, vol. 88(7-8), pages 1295-1306, July.
  30. Henning Bohn, 1999. "Should the Social Security Trust Fund Hold Equities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 666-697, July.
  31. Erik Hurst, 2004. "Grasshoppers, Ants and Pre-Retirement Wealth: A Test of Permanent Income Consumers," Working Papers, University of Michigan, Michigan Retirement Research Center wp088, University of Michigan, Michigan Retirement Research Center.
  32. David Altig & Steve J. Davis, 1991. "The Timing of Intergenerational Transfers, Tax Policy, and Aggregate Savings," NBER Working Papers 3753, National Bureau of Economic Research, Inc.
  33. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
  34. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, Elsevier, vol. 26(3), pages 303-326, April.
  35. Martin Feldstein, 1982. "The Optimal Level of Social Security Benefits," NBER Working Papers 0970, National Bureau of Economic Research, Inc.
  36. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  37. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 1997. "What Accounts for the Variation in Retirement Wealth Among U.S. Households?," Working Papers, Stanford University, Department of Economics 97035, Stanford University, Department of Economics.
  38. repec:fth:harver:1435 is not listed on IDEAS
  39. Abel, Andrew B, 1986. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," Econometrica, Econometric Society, Econometric Society, vol. 54(5), pages 1079-97, September.
  40. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  41. Hubbard, R Glenn & Judd, Kenneth L, 1987. "Social Security and Individual Welfare: Precautionary Saving, Borrowing Constraints, and the Payroll Tax," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 630-46, September.
  42. Martin Feldstein & Horst Siebert, 2002. "Social Security Pension Reform in Europe," NBER Books, National Bureau of Economic Research, Inc, number feld02-2, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. repec:dgr:uvatin:2010128 is not listed on IDEAS
  2. Frank Caliendo & Emin Gahramanov, 2013. "Myopia and pensions in general equilibrium," Journal of Economics and Finance, Springer, Springer, vol. 37(3), pages 375-401, July.
  3. Alan D. Viard, 2006. "The welfare effects of pay-as-you-go retirement programs: the role of tax and benefit timing," Working Papers, Federal Reserve Bank of Dallas 0602, Federal Reserve Bank of Dallas.
  4. Athreya, Kartik B., 2008. "Default, insurance, and debt over the life-cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(4), pages 752-774, May.
  5. Alisdair McKay, 2013. "Online Appendix to "Search for Financial Returns and Social Security Privatization"," Technical Appendices 12-80, Review of Economic Dynamics.
  6. Laitner, John & Silverman, Dan, 2012. "Consumption, retirement and social security: Evaluating the efficiency of reform that encourages longer careers," Journal of Public Economics, Elsevier, Elsevier, vol. 96(7-8), pages 615-634.
  7. Roel M. W. J. Beetsma & Alessandro Bucciol, 2010. "Differentiating Indexation in Dutch Pension Funds," CESifo Working Paper Series 3305, CESifo Group Munich.
  8. 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.
  9. 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.
  10. Ajello, Andrea, 2010. "Financial intermediation, investment dynamics and business cycle fluctuations," MPRA Paper 32447, University Library of Munich, Germany, revised Mar 2011.
  11. 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.
  12. 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".
  13. Gahramanov, Emin, 2013. "Survival misperception, time inconsistency, and implications for life-cycle saving and welfare," Economic Modelling, Elsevier, Elsevier, vol. 32(C), pages 539-550.
  14. 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.
  15. T. Findley & Frank Caliendo, 2009. "Short horizons, time inconsistency, and optimal social security," International Tax and Public Finance, Springer, Springer, vol. 16(4), pages 487-513, August.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:10282. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.