Munich Personal RePEc Archive

Is the Social Security Crisis Really as Bad as We Think?

Bagchi, Shantanu (2013): Is the Social Security Crisis Really as Bad as We Think?

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Abstract

Because they ignore the household-level and macroeconomic adjustments associated with longevity improvements, the actuarial projections of the Social Security Administration overestimate the Social Security crisis. Using a general-equilibrium model with heterogeneous agents and incomplete markets, I show that accounting for these adjustments, a significantly smaller decline in benefits is needed to balance the Social Security budget. Households respond to the longevity improvements by delaying retirement and Social Security benefit collection, working more hours, and by also saving more. In general equilibrium, these effects lead to a natural expansion of Social Security's tax base and generate significant delayed retirement credits, which the actuarial estimates completely overlook.

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