A Certainty Equivalent Valuation of Social Security Entitlements

37 Pages Posted: 14 Feb 2015 Last revised: 10 Mar 2015

See all articles by Sylvain Catherine

Sylvain Catherine

University of Pennsylvania - Finance Department

Date Written: February 13, 2015

Abstract

This paper computes the certainty equivalent of the United States Social Security in a calibrated life-cycle model when the stock and labor markets are cointegrated. In the baseline calibration, the certainty equivalent of current workers and retirees is found to be 37% lower at the national scale than the sum of expected cash flows discounted at the risk-free rate. The results suggest that the present value of pension entitlements and the transition cost to a funded system may be largely overestimated if not properly risk-adjusted.

Keywords: Household finance, Social Security, Public liabilities, Portfolio choices

JEL Classification: G11, G18, D91, H55, H06

Suggested Citation

Catherine, Sylvain, A Certainty Equivalent Valuation of Social Security Entitlements (February 13, 2015). HEC Paris Research Paper No. FIN-2015-1086. Available at SSRN: https://ssrn.com/abstract=2564431 or http://dx.doi.org/10.2139/ssrn.2564431

Sylvain Catherine (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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