UM03-02: Lifetime Uncertainty and Social Security Reform
Economists have two standard models for analyzing private saving in a macroeconomic context. In one, the so–called overlapping generations, or life–cycle, framework, households save to smooth their lifetime consumption — quintessentially, to maintain their standard of living after their earnings drop during retirement. In the other, the dynastic model, sometimes called the “altruistic model,” family lines husband estates to protect the living standards of their descendants. In the first framework, changes in social security, such as funding part of the existing system, as through private accounts, could affect the economy’s overall stock of wealth a great deal. According to the other, changes in social security might well have little impact upon the national stock of wealth. The author’s prior work seeks to develop a framework combining the two standard models. Calibrations of the combined framework hint at very interesting results for social security policy (and estate tax reform). This project would seek to improve the quality of the calibrations. Specifically, it would seek to incorporate lifetime earnings fluctuations. These may well be important in practice and will lead to precautionary saving which augments life–cycle saving for retirement. This will produce a more realistic calibrated model. The framework’s policy implications are potentially sensitive to such changes.