Welfare Effect of Social Security: With Uninsured Income Ris k (with Gaetano Bloise)
Abstract:
We provide an analytical decomposition of the welfare e ffect of raising the contribution rate of a pay-as-you-go social security a t equilibrium, in a standard two-period lived overlapping generations econo my with productive uncertainty and old age idiosyncratic labor income risks . Assuming Epstein-Zin preference representation and Cobb-Douglas technolog y, the welfare effect can be decomposed into a "direct'" effect, which take s into account the inter-generations reallocation of consumption and risk a t status quo, and a "general equilibrium" effect, that takes into account t he reallocation of capital and labor. The relevant statistics that affect t hese two components are the growth-adjusted dominant root of the stochastic discount factor at the competitive equilibrium and the covariance between wages and individual labor productivity. The former is negative (positive) under dynamic efficiency (inefficiency) and latter is positive under crowdi ng out, because a lower capital accumulation reduces the risk associated wi th the interaction between aggregate and individual uncertainty. In a calib ration exercise, we show that the net effect is positive for empirically pl ausible values of the long run average safe rate, GDP growth and for a larg e enough risk aversion.
DTSTAMP:20260421T084047Z DTSTART:20241204T130000Z DTEND:20241204T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR