A Life-Cycle Analysis of Social Security with Housing

Abstract

This paper incorporates two features of housing in a life-cycle analysis of social security: housing as a durable good and housing market frictions. We …nd that with housing as a durable good unfunded social security substantially crowds out housing consumption throughout the life cycle. By contrast, aggregate non-durable consumption is higher when social security is present, although it is postponed until late in life. Moreover, in the presence of housing market frictions, social security lowers the aggregate home ownership rate and reduces the average size of owner-occupied housing. The e¤ects of social security on housing position, furthermore, exhibit substantial heterogeneity across households of di¤erent income levels.

Home production and Social Security reform

“…Adding this important degree of realism to the model requires an additional state variable; so for computational reasons, we eliminate owner-occupied housing and instead treat all housing in the economy as rental. As is shown in Chen (2010), this simpli…cation is not likely to noticeably a¤ect our results.…”

“…The end result is that total welfare increases by 16:48 percent. The 7 percentage point di¤erence between welfare gain in this economy and that in the one-good economy results from the changes in the relative price between housing services and the other goods as in Chen (2010). The 4 percentage point di¤erence between welfare gain in this economy and the benchmark economy (20:75 16:48) stems from the introduction of home production to the multi-good economy.…”

“…For simplicity, we assume that the labor e¢ ciency pro…le for home production is constant. 11 The Social Security earnings cap y max is 2:47. The retirement bene…t at age 66 is calculated to mimic the Old Age and Survivor Insurance component of the Social The bend points and Social Security earnings cap, expressed as fractions of average earnings, and marginal rates, are from Huggett and Ventura (2000).…”

“…Because housing services contribute to utility and eliminating Social Security reduces the real interest rate, the existence of housing services that appear separately in the model provides for additional welfare gains. This channel has been explored by Chen (2010). The other margin of substitution present in the home-production economy is the ability to substitute work at home for work in the market place and low productivity workers and retirees use this margin as an insurance mechanism.…”

Consumption and Time Use Over the Life Cycle

“…Other possibilities include using tax benefits of owning as in Gervais () and Chambers et al. (), assuming higher depreciation of rental properties as in Chen (), or putting a greater desire for owner occupied housing in the utility function as in Kiyotaki et al. ().…”