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Social Security and Inequality over the Life Cycle

In: The Distributional Aspects of Social Security and Social Security Reform

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  • Angus S. Deaton
  • Pierre-Olivier Gourinchas
  • Christina Paxson

Abstract

This paper examines the consequences of social security reform for the inequality of consumption across individuals. The idea is that inequality is at least in part the result of individual risk in earnings or asset returns, the effects of which accumulate over time to increase inequality within groups of people as they age. Institutions such as social security, that share risk across individuals, will moderate the transmission of individual risk into inequality. We examine how different social security systems, with different degrees of risk sharing, affect consumption inequality. We do so within the framework of the permanent income hypothesis, and also using richer models of consumption that incorporate precautionary saving motives and borrowing restrictions. Our results indicate that systems in which there is less sharing of earnings risk such as systems of individual accounts produce higher consumption inequality both before and after retirement. However, differences across individuals in the rate of return on assets (including social security assets held in individual accounts) produce only modest additional effects on inequality.
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Suggested Citation

  • Angus S. Deaton & Pierre-Olivier Gourinchas & Christina Paxson, 2002. "Social Security and Inequality over the Life Cycle," NBER Chapters,in: The Distributional Aspects of Social Security and Social Security Reform, pages 115-148 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:9750
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    References listed on IDEAS

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    1. James M. Poterba & David A. Wise, 1998. "Individual Financial Decisions in Retirement Saving Plans and the Provision of Resources for Retirement," NBER Chapters,in: Privatizing Social Security, pages 363-401 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Jacques Le Cacheux & Vincent Touzé, 2002. "Les modèles d'équilibre général calculable à générations imbriquées. Enjeux, méthodes et résultats," Revue de l'OFCE, Presses de Sciences-Po, vol. 80(1), pages 87-113.
    2. Jimeno, Juan F. & Rojas, Juan A. & Puente, Sergio, 2008. "Modelling the impact of aging on social security expenditures," Economic Modelling, Elsevier, vol. 25(2), pages 201-224, March.
    3. repec:spo:wpecon:info:hdl:2441/2091 is not listed on IDEAS
    4. Huggett, Mark & Ventura, Gustavo & Yaron, Amir, 2006. "Human capital and earnings distribution dynamics," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 265-290, March.
    5. Peter Arno & Kyle Moore, 2016. "The "Natural" Interest Rate and Secular Stagnation," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2016-02, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    6. Thomas L. Hungerford, 2006. "The role of earnings and financial risk in distributional analyses of Social Security reform measures," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 25(2), pages 417-438.
    7. Falilou Fall, 2007. "Pension Reforms, Assets Returns and Wealth Distribution," Annals of Economics and Statistics, GENES, issue 85, pages 81-96.
    8. repec:sbe:breart:v:26:y:2006:i:1:a:2500 is not listed on IDEAS
    9. Jess Benhabib & Alberto Bisin, 2006. "The distribution of wealth and redistributive policies," 2006 Meeting Papers 368, Society for Economic Dynamics.
    10. Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 609-633, April.
    11. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2004. "The Cross-Sectional Implications of Rising Wage Inequality in the United States," CEPR Discussion Papers 4296, C.E.P.R. Discussion Papers.
    12. Kaymak, Barış & Poschke, Markus, 2016. "The evolution of wealth inequality over half a century: The role of taxes, transfers and technology," Journal of Monetary Economics, Elsevier, vol. 77(C), pages 1-25.

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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