Social Security, Benefit Claiming and Labor Force Participation: A Quantitative General Equilibrium Approach

by Selahattin İmrohoroğlu and Sagiri Kitao

March 2010

WP#2010-02

Abstract

We build a general equilibrium model with endogenous saving, labor force participation, work hours and Social Security benefit claiming, in which overlapping generations of individuals face income, survival, and health expenditure risks in incomplete markets. We use the model to study the impact of three Social Security reforms: reductions in benefits and payroll taxes, an increase in the early retirement age from 62 to 64, and an increase in the normal retirement age from 66 to 68. We show that a reform can have a significant effect on the budget of Social Security through changes in savings as well as benefit claiming and labor force participation. When the projected aging of the population is taken into account, the case for a reform that encourages labor force participation of the elderly becomes stronger.

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Selahattin İmrohoroğlu is professor of finance and business economics at the
University of Southern California Marshall School of Business. Sagiri Kitao is
an economist at the Federal Reserve Bank of New York.
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