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Uncertain Lifetimes, Pensions, and Individual Saving

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  • R. Glenn Hubbard

Abstract

Attempts to measure the impacts of pensions on household saving have occupied much of the literature in empirical public finance over the past decade. The emphasis here is on the annuity insurance aspects of social security and pensions. A simple life-cycle model is put forth to show that even anactuarially fair, fully funded social security system can reduce individual saving by more than the tax paid. Hence, previous partial equilibrium estimates of the impact of social security on saving drawn solely from consideration of the intergenerational wealth transfer at the introduction of the system are, if anything too small. The large partial equilibrium effects are mitigated when initial endowments are considered. To the extent that the introduction of social security reduces the size of unplanned bequests, its net effect on the consumption of subsequent generations is diminished. The final sections of the paper extend the approach to private pensions and address empirical issues. Using a model specification for individual wealth accumulation from the literature, potential offsets are interpreted according to the presence or absence of a bequest motive and according to the ability of individuals to adjust their participation in private pensions to counteract involuntary changes in social security.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1363.

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Date of creation: Feb 1988
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Publication status: published as Hubbard, R. Glenn. "Uncertain Lifetimes, Pensions, and Individual Saving." Issues in Pension Economics, edited by Zvi Bodie, John Shoven and David A. Wise, pp. 175-206. Chicago: University of Chicago Press, 1987.
Handle: RePEc:nbr:nberwo:1363

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  1. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, Elsevier, vol. 16(2), pages 167-207, December.
  2. Michael D. Hurd & John B. Shoven, 1983. "The Distributional Impact of Social Security," NBER Working Papers 1155, National Bureau of Economic Research, Inc.
  3. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 630-49, November.
  4. King, M A & Dicks-Mireaux, L-D L, 1982. "Asset Holdings and the Life-Cycle," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 92(366), pages 247-67, June.
  5. E. Sheshinski & Y. Wiess, 1978. "Uncertainty and Optimal Social Security Systems," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 225, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 8(3), pages 275-298, December.
  7. Menchik, Paul L & David, Martin, 1983. "Income Distribution, Lifetime Savings, and Bequests," American Economic Review, American Economic Association, American Economic Association, vol. 73(4), pages 672-90, September.
  8. White, Betsy Buttrill, 1978. "Empirical Tests of the Life Cycle Hypothesis," American Economic Review, American Economic Association, American Economic Association, vol. 68(4), pages 547-60, September.
  9. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  10. Barro, Robert J & Friedman, James W, 1977. "On Uncertain Lifetimes," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(4), pages 843-49, August.
  11. Edward P. Lazear, 1985. "Incentive Effects of Pensions," NBER Chapters, in: Pensions, Labor, and Individual Choice, pages 253-282 National Bureau of Economic Research, Inc.
  12. Alan S. Blinder & Roger H. Gordon & Donald E. Wise, 1981. "Social Security, Bequests, and the Life Cycle Theory of Saving: Cross-Sectional Tests," NBER Working Papers 0619, National Bureau of Economic Research, Inc.
  13. Laurence J. Kotlikoff & Avia Spivak, 1979. "The Family as an Incomplete Annuities Market," UCLA Economics Working Papers, UCLA Department of Economics 151, UCLA Department of Economics.
  14. Kotlikoff, Laurence J, 1979. "Testing the Theory of Social Security and Life Cycle Accumulation," American Economic Review, American Economic Association, American Economic Association, vol. 69(3), pages 396-410, June.
  15. Levhari, David & Mirman, Leonard J, 1977. "Savings and Consumption with an Uncertain Horizon," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(2), pages 265-81, April.
  16. Kotlikoff, Laurence J & Summers, Lawrence H, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 706-32, August.
  17. Kotlikoff, Laurence J, 1979. "Social Security and Equilibrium Capital Intensity," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(2), pages 233-53, May.
  18. Mirer, Thad W, 1979. "The Wealth-Age Relation among the Aged," American Economic Review, American Economic Association, American Economic Association, vol. 69(3), pages 435-43, June.
  19. 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.
  20. Farber, Henry S, 1978. "Individual Preferences and Union Wage Determination: The Case of the United Mine Workers," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(5), pages 923-42, October.
  21. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 88(1), pages 44-62, February.
  22. Leimer, Dean R & Lesnoy, Selig D, 1982. "Social Security and Private Saving: New Time-Series Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(3), pages 606-29, June.
  23. Philip Cagan, 1965. "The Effect of Pension Plans on Aggregate Saving: Evidence from a Sample Survey," NBER Books, National Bureau of Economic Research, Inc, number caga65-2.
  24. Mervyn A. King & Louis Dicks-Mireaux, 1981. "Asset Holdings and the Life Cycle," NBER Working Papers 0614, National Bureau of Economic Research, Inc.
  25. John G. Riley, 1976. "Informational Equilibrium," UCLA Economics Working Papers, UCLA Department of Economics 071, UCLA Department of Economics.
  26. Davies, James B, 1981. "Uncertain Lifetime, Consumption, and Dissaving in Retirement," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(3), pages 561-77, June.
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Cited by:
  1. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, . "New Evidence on the Money's Worth of Individual Annuities," Pension Research Council Working Papers, Wharton School Pension Research Council, University of Pennsylvania 97-9, Wharton School Pension Research Council, University of Pennsylvania.
  2. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, Elsevier, vol. 82(1), pages 29-62, October.
  3. R. Glenn Hubbard & Kenneth L. Judd, 1987. "Finite Lifetimes, Borrowing Constraints, and Short-Run Fiscal Policy," NBER Working Papers 2158, National Bureau of Economic Research, Inc.
  4. Michael D. Hurd, 1987. "The Marginal Value of Social Security," NBER Working Papers 2411, National Bureau of Economic Research, Inc.
  5. Michael D. Hurd, 1989. "The Poverty of Widows: Future Prospects," NBER Chapters, in: The Economics of Aging, pages 201-230 National Bureau of Economic Research, Inc.
  6. Willman, Alpo, 2007. "Sequential optimization, front-loaded information, and U.S. consumption," Working Paper Series, European Central Bank 0765, European Central Bank.

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