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The Marginal Value of Social Security

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  • Michael D. Hurd

Abstract

If annuities such as Social Security are not chosen freely, the consumption path typically cannot be determined independently of the path of annuities. This constraint reduces the value of the annuity from the point of view of the annuitant. I measure the value of the annuity by the marginal rate of substitution (MRS), the amount of bequeathable wealth that will substitute for a dollar of annuity wealth. In the analytical section of the paper, I show that the MRS increases as bequeathable wealth increases; in that sense the wealthy benefit more from Social Security than the poor. In the empirical section, I estimate the MRS for a sample of retired single elderly. The MRS varies considerably from individual to individual because of differences in the mix of bequeathable wealth and annuities. For the parameter values that best fit the data, a substantial fraction of the sample has more Social Security than it would like in that it would be willing to trade, at the margin, a claim to Social Security for an increase in bequeathable wealth.

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  • Michael D. Hurd, 1987. "The Marginal Value of Social Security," NBER Working Papers 2411, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2411
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    References listed on IDEAS

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    1. Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1.
    2. B. Douglas Bernheim, 1987. "Dissaving after Retirement: Testing the Pure Life Cycle Hypothesis," NBER Chapters, in: Issues in Pension Economics, pages 237-280, National Bureau of Economic Research, Inc.
    3. R. Glenn Hubbard, 1987. "Uncertain Lifetimes, Pensions, and Individual Saving," NBER Chapters, in: Issues in Pension Economics, pages 175-210, National Bureau of Economic Research, Inc.
    4. Bodie, Zvi & Shoven, John B. & Wise, David A. (ed.), 1987. "Issues in Pension Economics," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226062846.
    5. Michael D. Hurd & John B. Shoven, 1983. "The Economic Status of the Elderly," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 359-398, National Bureau of Economic Research, Inc.
    6. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
    7. Hurd, Michael D, 1987. "Savings of the Elderly and Desired Bequests," American Economic Review, American Economic Association, vol. 77(3), pages 298-312, June.
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    Cited by:

    1. Michael D. Hurd, 1989. "Issues and Results from Research on the Elderly I: Economic Status (Part I of III Parts)," NBER Working Papers 3018, National Bureau of Economic Research, Inc.
    2. Michael Hurd, 1993. "The effect of changes in Social Security on bequests," Journal of Economics, Springer, vol. 7(1), pages 157-176, December.
    3. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
    4. Michael Hurd, 2003. "Are Bequests Accidental or Desired?," Working Papers 03-13, RAND Corporation.

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