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Consumption, Retirement, and Social Security: Evaluating the Efficiency of Reform with a Life-Cycle Model

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  • John Laitner

    (University of Michigan)

  • Daniel Silverman

    (University of Michigan)

Abstract

This paper analyzes the effect of a potential reform to the Social Security system on individuals’ retirement and consumption choices. We first estimate the coefficients for a life-cycle model. We assume intratemporally nonseparable preference orderings and endogenous retirement. Our framework allows the possibility of disability. The specification predicts a change in consumption at retirement; we use the empirical magnitude of the change, together with desired retirement age, to identify key parameters such as the curvature of the utility function. We then qualitatively and quantitatively study the possible long-run effect of a Social Security reform in which individuals no longer face the OASI payroll tax after some specified age, and their subsequent earnings have no bearing on their Social Security benefits. Simulations indicate that retirement ages would rise by as much as one year, equivalent variations could average $5000 (1984 dollars) per household or more, and reform could generate $2500 or more additional income tax revenue per household.

Suggested Citation

  • John Laitner & Daniel Silverman, 2006. "Consumption, Retirement, and Social Security: Evaluating the Efficiency of Reform with a Life-Cycle Model," Working Papers wp142, University of Michigan, Michigan Retirement Research Center.
  • Handle: RePEc:mrr:papers:wp142
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    2. Gopi Shah Goda & John B. Shoven & Sita Nataraj Slavov, 2011. "Implicit Taxes on Work from Social Security and Medicare," Tax Policy and the Economy, University of Chicago Press, vol. 25(1), pages 69-88.
    3. Hugo Benítez-Silva & J. Ignacio García-Pérez & Sergi Jiménez-Martín, 2011. "The effects of employment uncertainty and wealth shocks on the labor supply and claiming behavior of older American workers," Economics Working Papers 1275, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Michael D. Hurd & Pierre-Carl Michaud & Susann Rohwedder, 2008. "Using International Micro Data to Learn about Individuals' Responses to Changes in Social Insurance," Working Papers 626, RAND Corporation.
    5. Christopher House & John Laitner & Dmitriy Stolyarov, 2007. "This study seeks to quantify determinants, and costs, of the labor­force participation of married women. We use demographic and earnings data from the Health and Retirement Study. The earnings data co," Working Papers wp171, University of Michigan, Michigan Retirement Research Center.
    6. Christopher House & John Laitner & Dmitriy Stolyarov, 2006. "Home Production by Dual Earner Couples and Consumption During Retirement," Working Papers wp143, University of Michigan, Michigan Retirement Research Center.

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