Social Insurance for the Elderly

45 Pages Posted: 7 Mar 2020

See all articles by Se Yung Bae

Se Yung Bae

Ajou University - Department of Financial Engineering

Junkee Jeon

Kyung Hee University - Department of Applied Mathematics

Hyeng Keun Koo

Ajou University - Department of Business Administration

Kyunghyun Park

The Chinese University of Hong Kong, Department of Statistics

Date Written: February 10, 2020

Abstract

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

Suggested Citation

Bae, Se Yung and Jeon, Junkee and Koo, Hyeng Keun and Park, Kyunghyun, Social Insurance for the Elderly (February 10, 2020). Available at SSRN: https://ssrn.com/abstract=3535662 or http://dx.doi.org/10.2139/ssrn.3535662

Se Yung Bae

Ajou University - Department of Financial Engineering ( email )

Suwon
Korea, Republic of (South Korea)

Junkee Jeon

Kyung Hee University - Department of Applied Mathematics ( email )

1732 Deogyeong-daero, Giheung-gu,
Yongin, 130-701
Korea, Republic of (South Korea)

Hyeng Keun Koo

Ajou University - Department of Business Administration ( email )

206 Worldcup-ro
Yeongtong-gu
Suwon, 443-749
Korea, Republic of (South Korea)

Kyunghyun Park (Contact Author)

The Chinese University of Hong Kong, Department of Statistics ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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