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A Certainty Equivalent Valuation of Social Security Entitlements

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  • Catherine , Sylvain

Abstract

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.

Suggested Citation

  • Catherine , Sylvain, 2015. "A Certainty Equivalent Valuation of Social Security Entitlements," HEC Research Papers Series 1086, HEC Paris.
    • Handle: RePEc:ebg:heccah:1086
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    More about this item

    Keywords

    Household finance; Social Security; Public liabilities; Portfolio choices;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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