Modeling the Macroeconomic Implications of Social Security Reform

Published: 2000
Project ID: UM00-11


Two models dominate the economics literature on why people save (and hence on why they accumulate wealth). In one, the life–cycle model, people save when they are young in order to have funds to support their retirement. In the other, the dynastic model, households save to build estates to pass to their descendants. From the standpoint of public policy analysis, the two models can have quite different predictions. It is also the case that research shows that either model by itself has shortcomings in describing actual savings behavior. In this paper, I show how one might combine the two basic models, what advantages the combined framework might have in matching empirical evidence, and what implications for public policy — specifically Social Security reform — the combined model might have. A relatively straightforward combination of existing economic models seems to offer the potential of explaining a number of empirical features of the U.S. economy that have heretofore been somewhat opaque. Precise calibrations of the parameters of the combined model are important since the potential range of policy implications is broad. At this point, analysis suggests that outcomes from Social Security reform such as greater equality, flexibility, and sustainability may be at least as important as potential long–run increases in national saving.


John Laitner