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The True Cost of Social Security

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  • Alexander W. Blocker
  • Laurence J. Kotlikoff
  • Stephen A. Ross

Abstract

Implicit government obligations represent the lion's share of government liabilities in the U.S. and many other countries. Yet these liabilities are rarely measured, let alone properly adjusted for their risk. This paper shows, by example, how modern asset pricing can be used to value implicit fiscal debts taking into account their risk properties. The example is the U.S. Social Security System's net liability to working-age Americans. Marking this debt to market makes a big difference; its market value is 23 percent larger than the Social Security trustees' valuation method suggests.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14427.

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Date of creation: Oct 2008
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Handle: RePEc:nbr:nberwo:14427

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  1. Marianne Baxter, 2001. "Social Security as a Financial Asset: Gender-Specific Risks and Returns," NBER Working Papers 8329, National Bureau of Economic Research, Inc.
  2. Jerry Green & Laurence J. Kotlikoff, 2006. "On the General Relativity of Fiscal Language," NBER Working Papers 12344, National Bureau of Economic Research, Inc.
  3. Donald W.K. Andrews & Christopher J. Monahan, 1990. "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Cowles Foundation Discussion Papers 942, Cowles Foundation for Research in Economics, Yale University.
  4. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1991. "Generational Accounts - A Meaningful Alternative to Deficit Accounting," NBER Working Papers 3589, National Bureau of Economic Research, Inc.
  5. Ross, Stephen A, 1978. "A Simple Approach to the Valuation of Risky Streams," The Journal of Business, University of Chicago Press, vol. 51(3), pages 453-75, July.
  6. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  7. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
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Cited by:
  1. Laurence Kotlikoff, 2013. "The US Fiscal Cliff – When Economists Recklessly Endanger the Economy," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 14(2), pages 03-08, 08.
  2. John Geanakoplos & Stephen P. Zeldes, 2009. "Market Valuation of Accrued Social Security Benefits," NBER Working Papers 15170, National Bureau of Economic Research, Inc.

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