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SOCIAL SECURITY AND LONGEVITY RISK: THE CASE OF RISKY BEQUEST INCOME

Published online by Cambridge University Press:  26 February 2021

Erin N. Cottle Hunt
Affiliation:
Lafayette College
Frank N. Caliendo*
Affiliation:
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: frank.caliendo@usu.edu. Phone: 435 797 2963.

Abstract

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.

Type
Articles
Copyright
© Cambridge University Press 2021

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