Hostname: page-component-797576ffbb-58z7q Total loading time: 0 Render date: 2023-12-08T08:29:12.350Z Has data issue: false Feature Flags: { "corePageComponentGetUserInfoFromSharedSession": true, "coreDisableEcommerce": false, "useRatesEcommerce": true } hasContentIssue false


Published online by Cambridge University Press:  26 February 2021

Erin N. Cottle Hunt
Lafayette College
Frank N. Caliendo*
Utah State University
Address correspondence to: Frank N. Caliendo, Department of Economics and Finance, 3565 Old Main Hill, Utah State University, Logan, UT84322-3565, USA. e-mail: Phone: 435 797 2963.


This paper quantifies the welfare gains from Social Security when individuals face uninsurable longevity risk. While past researchers have studied this basic question, we do so from a unique perspective. In contrast to traditional macroeconomic models that abstract from specific linkages between parents and children, in our model, children are born to specific parents whose longevity is uncertain. And because parental asset holdings evolve over the life of the parent, children face uninsurable bequest income risk in addition to their own longevity risk. We find that Social Security improves ex ante expected utility by 3.4% of lifetime consumption (for the second generation). Because our baseline analysis assumes full information and optimal hedging of longevity risk, we treat these welfare gains as a conservative estimate, and we show that the gains are significantly larger when individuals fail to hedge their longevity risk.

© Cambridge University Press 2021

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)



Alonso-Ortiz, J. (2014) Social security and retirement across the OECD. Journal of Economic Dynamics and Control 47, 300316.10.1016/j.jedc.2014.07.014CrossRefGoogle Scholar
Andersen, T. and Bhattacharya, J. (2011) On myopia as rationale for social security. Economic Theory 47(1), 135158.10.1007/s00199-010-0528-zCrossRefGoogle Scholar
Bishnu, M., Guo, N. L. and Kumru, C. S. (2019) Social security with differential mortality. Journal of Macroeconomics 62, 103077.10.1016/j.jmacro.2018.11.005CrossRefGoogle Scholar
Brown, J. R. (2000) How Should We Insure Longevity Risk In Pensions And Social Security? Issues in Brief ib-4, Center for Retirement Research.Google Scholar
Brown, J. R. (2001) Private pensions, mortality risk, and the decision to annuitize. Journal of Public Economics 82(1), 2962.10.1016/S0047-2727(00)00152-3CrossRefGoogle Scholar
Bucciol, A. (2011) A note on social security welfare with self-control problems. Macroeconomic Dynamics 15(4), 579594.10.1017/S1365100510000209CrossRefGoogle Scholar
Bütler, M. (1999) Anticipation effects of looming public-pension reforms. Carnegie-Rochester Conference Series on Public Policy 50, 119159.10.1016/S0167-2231(99)00024-XCrossRefGoogle Scholar
Bütler, M. (2001) Neoclassical life-cycle consumption: A textbook example. Economic Theory 17(1), 209221.10.1007/PL00004098CrossRefGoogle Scholar
Caliendo, F. N., Casanova, M., Gorry, A. and Slavov, S. (2020) Retirement timing uncertainty: Empirical evidence and quantitative evaluation. working paper.Google Scholar
Caliendo, F. N., Aspen, G. and Slavov, S. (2019) The cost of uncertainty about the timing of social security reform. European Economic Review 118, 101125.10.1016/j.euroecorev.2019.05.008CrossRefGoogle Scholar
Caliendo, F. N., Guo, N. L. and Hosseini, R. (2014) Social security is not a substitute for annuity markets. Review of Economic Dynamics 17(4), 739755.10.1016/ Scholar
Conesa, J. C. and Garriga, C. (2008) Optimal fiscal policy in the design of social security reforms*. International Economic Review 49(1), 291318.CrossRefGoogle Scholar
Conesa, J. C. and Krueger, D. (1999) Social security reform with heterogeneous agents. Review of Economic Dynamics 2(4), 757795.10.1006/redy.1998.0039CrossRefGoogle Scholar
Coronado, J. L., Fullerton, D. and Glass, T. (1999) Distributional Impacts of Proposed Changes to the Social Security System, pp. 149186. MIT Press.CrossRefGoogle Scholar
Coronado, J. L., Fullerton, D. and Glass, T. (2002) Long-Run Effects of Social Security Reform Proposals on Lifetime Progressivity. In Feldstein and Liebman (2002), pp. 149206.Google Scholar
Coronado, J. L., Fullerton, D. and Glass, T. (2011) The progressivity of social security. The B.E. Journal of Economic Analysis & Policy 11(1).CrossRefGoogle Scholar
Cottle Hunt, E. (2020) Adaptive learning, social security reform, and policy uncertainty. Journal of Money, Credit, and Banking, forthcoming.10.1111/jmcb.12770CrossRefGoogle Scholar
Cremer, H., Donder, P., Maldonado, D. and Pestieau, P. (2008) Designing a linear pension scheme with forced savings and wage heterogeneity. International Tax and Public Finance 15(5), 547562.CrossRefGoogle Scholar
Cremer, H. and Pestieau, P. (2011) Myopia, redistribution and pensions. European Economic Review 55(2), 165175.CrossRefGoogle Scholar
Davidoff, T., Brown, J. R. and Diamond, P. A. (2005) Annuities and individual welfare. American Economic Review 95(5), 15731590.10.1257/000282805775014281CrossRefGoogle Scholar
De Nardi, M. (2004) Wealth inequality and intergenerational links. The Review of Economic Studies 71(3), 743768.CrossRefGoogle Scholar
Fehr, H. and Habermann, C. (2008) Risk sharing and efficiency implications of progressive pension arrangements*. The Scandinavian Journal of Economics 110(2), 419443.CrossRefGoogle Scholar
Feigenbaum, J. (2008) Can mortality risk explain the consumption hump? Journal of Macroeconomics 30(3), 844872.CrossRefGoogle Scholar
Feldstein, M. (1985) The optimal level of social-security benefits. Quarterly Journal of Economics 100(2), 303320.10.2307/1885383CrossRefGoogle Scholar
Feldstein, M. and Liebman, J. B. (2002) The Distributional Aspects of Social Security and Social Security Reform. University of Chicago Press.CrossRefGoogle Scholar
Goda, G. S., Shoven, J. B. and Slavov, S. N. (2011) Differential Mortality by Income and Social Security Progressivity, pp. 189204. University of Chicago Press.Google Scholar
Gomes, F. J., Kotlikoff, L. J. and Viceira, L. M. (2012) The excess burden of government indecision. Tax Policy and the Economy 26(1), 125164.CrossRefGoogle Scholar
Gourinchas, P.-O. and Parker, J. A. (2002) Consumption over the life cycle. Econometrica 70(1), 4789.CrossRefGoogle Scholar
Hosseini, R. (2015) Adverse selection in the annuity market and the role for social security. Journal of Political Economy 123(4), 941.CrossRefGoogle Scholar
Huang, H., İmrohoroğlu, S. and Sargent, T. J. (1997) Two computations to fund social security. Macroeconomic Dynamics, 1(1):744.10.1017/S1365100597002010CrossRefGoogle Scholar
Hubbard, R. G. and Judd, K. L. (1987) Social security and individual welfare: Precautionary saving, borrowing constraints, and the payroll tax. The American Economic Review 77(4), 630.Google Scholar
Huggett, M. and Ventura, G. (1999) On the distributional effects of social security reform. Review of Economic Dynamics 2(3), 498531.10.1006/redy.1999.0051CrossRefGoogle Scholar
İmrohoroğlu, A., İmrohoroğlu, S. and Joines, D. H. (1995) A life-cycle analysis of social-security. Economic Theory 6(1), 83114.CrossRefGoogle Scholar
İmrohoroğlu, A., İmrohoroğlu, S. and Joines, D. H. (2003) Time-inconsistent preferences and social security*. The Quarterly Journal of Economics 118(2), 745784.10.1162/003355303321675509CrossRefGoogle Scholar
Kitao, S. (2014) Sustainable social security: Four options. Review of Economic Dynamics 17(4), 756779.CrossRefGoogle Scholar
Kitao, S. (2018) Policy uncertainty and cost of delaying reform: The case of aging Japan. Review of Economic Dynamics 27, 81100.CrossRefGoogle Scholar
Kotlikoff, L. J. and Spivak, A. (1981) The family as an incomplete annuities market. Journal of Political Economy 89(2), 372391.CrossRefGoogle Scholar
Liebman, J. B. (2002) Redistribution in the Current U.S. Social Security System. In Feldstein and Liebman (2002), pp. 1148.Google Scholar
Lockwood, L. M. (2012) Bequest motives and the annuity puzzle. Review of Economic Dynamics 15(2), 226243.10.1016/ ScholarPubMed
Luttmer, E. F. P. and Samwick, A. A. (2018) The welfare cost of perceived policy uncertainty: Evidence from social security. American Economic Review 108(2), 275307.10.1257/aer.20151703CrossRefGoogle ScholarPubMed
McGrattan, E. R. and Prescott, E. C. (2017) On financing retirement with an aging population. Quantitative Economics 8(1), 75115.CrossRefGoogle Scholar
Mitchell, O. S., Poterba, J. M., Warshawsky, M. J. and Brown, J. R. (1999) New evidence on the money’s worth of individual annuities. American Economic Review 89(5), 12991318.CrossRefGoogle Scholar
Nelson, J. (2020) Welfare implications of uncertain social security reform. Public Finance Review, 48(4), 425466.CrossRefGoogle Scholar
Stokey, N. L. (2016) Wait-and-see: Investment options under policy uncertainty. Review of Economic Dynamics 21, 246265.CrossRefGoogle Scholar
Yaari, M. E. (1965) Uncertain lifetime, life insurance, and the theory of the consumer. Review of Economic Studies 32(2), 137150.CrossRefGoogle Scholar