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The Marginal Value of Social Security

  • Michael D. Hurd

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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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
Note: AG
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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. Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Issues in Pension Economics," NBER Books, National Bureau of Economic Research, Inc, number bodi87-1, October.
  3. Michael D. Hurd & John B. Shoven, 1982. "The Economic Status of the Elderly," NBER Working Papers 0914, National Bureau of Economic Research, Inc.
  4. 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.
  5. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
  6. Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1, October.
  7. R. Glenn Hubbard, 1984. "Uncertain Lifetimes, Pensions, and Individual Saving," NBER Working Papers 1363, National Bureau of Economic Research, Inc.
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