Labor Market Risk and the Private Value of Social Security
45 Pages Posted: 14 Feb 2015 Last revised: 15 Oct 2019
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: Suggested Citation