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Abstract
Using a simple expected utility function, we derive discount-rate adjustments for uncertain future expenditures (costs) and revenues (benefits). We apply these results to the individual’s valuation of the Social Security contract, to aggregate measures of Social Security’s obligations, and then to the possibility of a Pareto-improving transition to self-funded retirement savings. Individually, the existing Social Security contract has a negative value for all new entrants to the program. When the value of the program is adjusted for risk, it is possible for a “big bang” transition to self-funded retirement savings to be Pareto improving.
TOPICS: Social security, retirement
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