A Certainty Equivalent Valuation of Social Security Entitlements

Sylvain Catherine (1)

1 University of Pennsylvania

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

Domains: Business administration

Sylvain Catherine. A Certainty Equivalent Valuation of Social Security Entitlements. 2015. ⟨hal-02011400⟩