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The Marginal Value of Social Security

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  • Michael D. Hurd

Abstract

If annuities such as Social Security are not chosen freely, the consumption path typically cannot be determined independently of the path of annuities. This constraint reduces the value of the annuity from the point of view of the annuitant. I measure the value of the annuity by the marginal rate of substitution (MRS), the amount of bequeathable wealth that will substitute for a dollar of annuity wealth. In the analytical section of the paper, I show that the MRS increases as bequeathable wealth increases; in that sense the wealthy benefit more from Social Security than the poor. In the empirical section, I estimate the MRS for a sample of retired single elderly. The MRS varies considerably from individual to individual because of differences in the mix of bequeathable wealth and annuities. For the parameter values that best fit the data, a substantial fraction of the sample has more Social Security than it would like in that it would be willing to trade, at the margin, a claim to Social Security for an increase in bequeathable wealth.

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File URL: http://www.nber.org/papers/w2411.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2411.

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Date of creation: Oct 1987
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Publication status: published as (With Michael J. Boskin) Published as "The Effect of Social Security on Retirement in the Early 1970's", Quarterly Journal of Economics, Vol. 99,no. 4 (1984): 767-790.
Handle: RePEc:nbr:nberwo:2411

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References

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  1. Hurd, Michael D, 1987. "Savings of the Elderly and Desired Bequests," American Economic Review, American Economic Association, vol. 77(3), pages 298-312, June.
  2. B. Douglas Bernheim, 1987. "Dissaving after Retirement: Testing the Pure Life Cycle Hypothesis," NBER Chapters, in: Issues in Pension Economics, pages 237-280 National Bureau of Economic Research, Inc.
  3. Michael D. Hurd & John B. Shoven, 1983. "The Economic Status of the Elderly," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 359-398 National Bureau of Economic Research, Inc.
  4. R. Glenn Hubbard, 1988. "Uncertain Lifetimes, Pensions, and Individual Saving," NBER Working Papers 1363, National Bureau of Economic Research, Inc.
  5. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
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Cited by:
  1. Michael Hurd, 2003. "Are Bequests Accidental or Desired?," Working Papers 03-13, RAND Corporation Publications Department.
  2. Michael Hurd, 1993. "The effect of changes in Social Security on bequests," Journal of Economics, Springer, vol. 58(1), pages 157-176, December.
  3. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
  4. Michael D. Hurd, 1989. "Issues and Results from Research on the Elderly I: Economic Status (Part I of III Parts)," NBER Working Papers 3018, National Bureau of Economic Research, Inc.
  5. Michael Hurd, 1993. "The effect of changes in Social Security on bequests," Journal of Economics, Springer, vol. 7(1), pages 157-176, December.

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