Working Paper: NBER ID: w0730
Authors: Alan J. Auerbach; Laurence J. Kotlikoff
Abstract: The effect of social security and other forms of government debt on national savings is one of the most widely debated policy questions in economics today. Some estimates suggest that social security has reduced U.S. savings by almost forty percent. This paper examines recent cross-section and time series empirical tests of the social security-savings question and argues that, given current data, neither type of test has much potential for settling the controversy. In particular, there are a number of specification problems relating to social security time series regressions that can easily lead to highly unstable coefficients and to rejection of the hypothesis that social security reduces savings, even if it is actually true. These points are demonstrated by running regressions on hypothetical data generated by a perfect foresight life-cycle growth model developed previously by the authors. While the data is obtained from a model in which social security reduces the nation's capital stock by almost twenty percent, time series social security regression coefficients vary enormously depending on the specified level of the program, the preferences of hypothetical households, the level of concommitant government policies, and the time interval of the data.
Keywords: Social Security; Savings; Intertemporal Consumption; Government Debt
JEL Codes: H55; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government policies (H59) | regression outcomes (C29) |
| social security (H55) | national savings (D14) |
| social security (H55) | capital stock (E22) |