Social Insurance for the Elderly
45 Pages Posted: 7 Mar 2020
Date Written: February 10, 2020
In this paper, we study the economic effects of social insurance benefits for retired people. Specifically, we study a model in which all retired people are provided with a stream of payments by the social insurance program and investigate the consumption, investment, and retirement decisions. We also explore the implications of an increase in the benefits for the welfare of workers and the retirees. We show that an increase in the social insurance benefits (SIB) reduces optimal consumption, increases optimal risky investment and reduces the optimal threshold wealth level for retirement. The result of the model is consistent with the empirically observed strong positive correlation between social security coverage and stock market participation rates in countries. Under the balanced budget constraint in which revenues from the labor income tax finance the SIB, however, an increase in SIB reduces pre-retirement consumption and the optimal retirement wealth level for retirement but could decrease pre-retirement risky investments. We compare the case in which the basic support in retirement benefits is provided in perishable goods and services (case P) with that in which it is paid in cash (case C), and show that relative utility loss in the former case decreases with wealth after retirement but increases with wealth before retirement.
Keywords: Social Insurance, Consumption, Portfolio Selection, Retirement, Optimal stopping problem, Duality
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