A Certainty Equivalent Valuation of Social Security Entitlements
37 Pages Posted: 14 Feb 2015 Last revised: 10 Mar 2015
Date Written: February 13, 2015
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: Suggested Citation