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Labor Supply and the Optimality of Social Security

Listed author(s):
  • Shantanu Bagchi

    ()

    (Department of Economics, Towson University)

Traditional economic theory predicts that unfunded social security can be justified on the basis of its ability to efficiently finance retirement, and also for its ability to provide insurance against mortality risk and uninsurable shocks to labor income. In this paper, I demonstrate that the quantitative importance of the traditional roles of social security depends on how household labor supply responds to social security. I build a calibrated general-equilibrium model where social security has a large welfare-improving role, and I show that the distortionary effect on households' labor hours erases virtually all the welfare gains from social security. I also find that this result is robust within the range of labor supply elasticities usually encountered in the macroeconomic literature..

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File URL: http://webapps.towson.edu/cbe/economics/workingpapers/2014-04.pdf
File Function: First version, 2014
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Paper provided by Towson University, Department of Economics in its series Working Papers with number 2014-04.

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Length: 26 pages
Date of creation: Sep 2014
Date of revision: Sep 2014
Handle: RePEc:tow:wpaper:2014-04
Contact details of provider: Postal:
Towson, Maryland 21252-0001

Phone: 410-704-2959
Fax: 410-704-3424
Web page: http://www.towson.edu/cbe/departments/economics/

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