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

TitleConsumption, Retirement, and Social Security: Evaluating the Efficiency of Reform with a Life-Cycle Model
Publication TypeReport
Year of Publication2006
AuthorsLaitner, JP, Silverman, DS
InstitutionThe University of Michigan, Michigan Retirement Research Center
Call Numbernewpubs20070125_Laitner-Silverman_wp142
KeywordsConsumption and Savings, Public Policy, Social Security
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.

URLhttp://www.mrrc.isr.umich.edu/publications/papers/
Endnote Keywords

Social Security/Consumption/Tax Policy

Endnote ID

17050

Citation Key5664