Computing Models of Social Security

Abstract

Abstract A core topic of current economic research (and policy debate) is the evaluation of social security systems and their possible reforms. Shows how models of social security can be computed in economies where agents have uncertain lifespans and earnings profiles. In particular, it shows how to solve stationary equilibria and (within a linear quadratic formulation) how to solve transitional equilibria, such as the transition following a reform of the system. The two main sections of the chapter present: a model of social security with heterogeneous agents, which is related to several recent large‐scale general equilibrium, overlapping generations models; and a linear quadratic model of social security. These are both versions of an overlapping generations model with incomplete markets, and both assume that private annuity markets are missing, but they differ in their preference structures and certain other respects.

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