Friday, July 24, 2009

Social Security Is Better Off Than We Think

Social Security may be much more solvent than commonly believed. In a paper, "Market Valuation of Accrued Social Security Benefits," the authors, John Geanakoplos and Stephen P. Zeldes, find that the market valuation of future social security benefits is significantly less than the actuarial valuation.
We find that the difference between market valuation and “actuarial” valuation is large, especially when valuing the benefits of younger cohorts. Overall, the market value of accrued benefits is only 4/5 of that implied by the actuarial approach. Ignoring cohorts over age 60 (for whom the valuations are the same), market value is only 70% as large as that implied by the actuarial approach.

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