Working Paper: NBER ID: w10282
Authors: Erik Hurst; Paul Willen
Abstract: Most young households simultaneously hold both unsecured debt on which they pay an average of 10 percent interest and social security wealth on which they earn less than 2 percent. We document this fact using data from the Panel Study of Income Dynamics. We then consider a life-cycle model with optimizing and rule-of-thumb' households and explore ways to reduce this inefficiency. We show that both allowing households to use social security wealth to pay off debt and exempting young households from social security contributions (but in both cases requiring higher contributions later later in life) leads to increases in welfare for both types of households and significant increases in consumption and saving, and reductions in debt, for optimizing households.
Keywords: No keywords provided
JEL Codes: E2; E6; H3; H5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| social security wealth (H55) | debt levels (H63) |
| social security wealth (H55) | consumption patterns (D10) |
| policy changes (J18) | welfare (I38) |
| policy changes (J18) | debt levels (H63) |
| exempting young households from contributions (D14) | certain equivalent consumption (D11) |
| raising internal borrowing rate from 2% to 5% (E43) | welfare gains (D69) |
| eliminating social security (H55) | optimizing households' welfare (D10) |