Early Access to Social Security Wealth: A Welfare Analysis

• In Event: The Impacts of Public Pension Programs

Abstract

Social Security wealth represents the majority of lifetime assets for low wealth households in the United States. This wealth is inaccessible prior to retirement, making it difficult to use to smooth income and health shocks, fund education, or finance the down payment of a house. Moreover, many households for whom future Social Security benefits represent a large share of lifetime wealth, may lack full access to credit markets. We are interested in how early access to a small portion of Social Security wealth could impact the saving, consumption, and well-being of credit-constrained individuals. First, we consider a simple analytical model. We show that allowing access to a portion of Social Security wealth prior to retirement is particularly beneficial for low-income, credit-constrained individuals. This incremental policy reform has the potential to amplify the redistribution already present in the Social Security system and reduce inequality. Next, we consider the impact of early access to a portion of Social Security wealth by embedding this policy change into a rich, heterogeneous agent, life-cycle model. We simulate the consumption and saving decisions of heterogeneous households. We explore variations of early access to Social Security wealth and evaluate each using consumption equivalent variations.

Author

• Erin Cottle Hunt, Reed College