Labor Market Risk and the Private Value of Social Security

45 Pages Posted: 14 Feb 2015 Last revised: 15 Oct 2019

See all articles by Sylvain Catherine

Sylvain Catherine

University of Pennsylvania - Finance Department

Date Written: June 30, 2019


Social Security provides insurance against idiosyncratic income risk but exposes workers to systematic risk because benefits are indexed to the evolution of aggregate earnings. I calibrate a life-cycle model to compare workers' certainty equivalent valuation of Social Security to its net present value discounted at the risk-free rate. I show that, overall, labor market risk reduces current workers' private value of Social Security by 46%. This adjustment sums up to $11.4 trillions on the national scale and the equity premium is its main determinant. For workers under 30, the certainty equivalent of Social Security is negative. Exposure to systematic risk through Social Security peaks relatively late in the life-cycle.

Keywords: Household Finance, Social Security, Public Liabilities, Portfolio Choices, Human Capital, Labor Income Risk

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

Suggested Citation

Catherine, Sylvain, Labor Market Risk and the Private Value of Social Security (June 30, 2019). Available at SSRN: or

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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