Social Security and Inequality Over the Life Cycle

44 Pages Posted: 18 Apr 2000 Last revised: 17 Oct 2010

See all articles by Angus Deaton

Angus Deaton

Princeton University; National Bureau of Economic Research (NBER)

Pierre-Olivier Gourinchas

University of California, Berkeley - Department of Economics; University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Christina H. Paxson

Princeton University; National Bureau of Economic Research (NBER)

Date Written: February 2000

Abstract

This paper examines the consequences of social security reform for the inequality of consumption across individuals. The idea is that inequality is at least in part the result of individual risk in earnings or asset returns, the effects of which accumulate over time to increase inequality within groups of people as they age. Institutions such as social security, that share risk across individuals, will moderate the transmission of individual risk into inequality. We examine how different social security systems, with different degrees of risk sharing, affect consumption inequality. We do so within the framework of the permanent income hypothesis, and also using richer models of consumption that incorporate precautionary saving motives and borrowing restrictions. Our results indicate that systems in which there is less sharing of earnings risk such as systems of individual accounts produce higher consumption inequality both before and after retirement. However, differences across individuals in the rate of return on assets (including social security assets held in individual accounts) produce only modest additional effects on inequality.

Suggested Citation

Deaton, Angus S. and Gourinchas, Pierre-Olivier and Paxson, Christina H., Social Security and Inequality Over the Life Cycle (February 2000). NBER Working Paper No. w7570, Available at SSRN: https://ssrn.com/abstract=216760

Angus S. Deaton (Contact Author)

Princeton University ( email )

Woodrow Wilson School
Princeton, NJ 08544
United States
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HOME PAGE: http://www.wws.princeton.edu/~deaton

National Bureau of Economic Research (NBER)

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Pierre-Olivier Gourinchas

University of California, Berkeley - Department of Economics ( email )

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HOME PAGE: http://sites.google.com/view/pgourinchas

University of California, Berkeley - Economic Analysis & Policy Group ( email )

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United States

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National Bureau of Economic Research (NBER)

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HOME PAGE: http://www.nber.org/people/pierre-olivier_gourinchas

Centre for Economic Policy Research (CEPR)

London
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HOME PAGE: http://cepr.org/active/publications/discussion_papers/authorlist.php?ident=136737

Christina H. Paxson

Princeton University ( email )

316 Wallace Hall
Princeton, NJ 08544
United States
609-258-6474 (Phone)
609-258-5974 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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