A LIFE-CYCLE ANALYSIS OF SOCIAL-SECURITY

We develop an applied general equilibrium model to examine the optimal social security replacement rate and the welfare benefits associated with it. Our setup consists of overlapping generations of 65-period li ved individuals facing mortality risk and individual income risk. Priv ate credit markets, including markets for private annuities, are close d by assumption. Unlike previous analyses, we find that an unfunded so cial security system may well enhance economic welfare. In our benchma rk economy, the optimal social security replacement rate is 30%, and a n empirically more plausible replacement rate of 60% raises welfare co mpared with an economy with no social security system.