Social Security and Unsecured Debt
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)
NBER Working Paper No. w10282
Most young households simultaneously hold both unsecured debt on which they pay an average of 10 percent interest and social security wealth on which they earn less than 2 percent. We document this fact using data from the Panel Study of Income Dynamics. We then consider a life-cycle model with optimizing and rule-of-thumb' households and explore ways to reduce this inefficiency. We show that both allowing households to use social security wealth to pay off debt and exempting young households from social security contributions (but in both cases requiring higher contributions later later in life) leads to increases in welfare for both types of households and significant increases in consumption and saving, and reductions in debt, for optimizing households.
Number of Pages in PDF File: 57working papers series
Date posted: February 1, 2004
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