Les Cahiers de Recherche - HEC Paris
A Certainty Equivalent Valuation of Social Security Entitlements
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.
Keywords: Household finance; Social Security; Public liabilities; Portfolio choices; (follow links to similar papers)
JEL-Codes: D91; G11; G18; H55; H60; (follow links to similar papers)
37 pages, February 13, 2015
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