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IS THE SOCIAL SECURITY CRISIS REALLY AS BAD AS WE THINK?

Published online by Cambridge University Press:  29 June 2015

Shantanu Bagchi
Shantanu Bagchi*
Affiliation:
Towson University
*
Address correspondence to: Shantanu Bagchi, Department of Economics, Towson University, 8000 York Road, Towson, MD 21252, USA; e-mail: sbagchi@towson.edu.
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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 households and incomplete markets, I show that with these adjustments accounted for, a significantly smaller decline in benefits is needed to balance the Social Security budget. Households respond by delaying retirement and Social Security benefit collection, by 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.

Keywords

Social SecurityLongevity ImprovementGeneral EquilibriumDelayed RetirementDelayed Retirement Credit
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 3 , April 2016 , pp. 737 - 776
Copyright
Copyright © Cambridge University Press 2015 

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