Social Security, Uncertainty Adjustments and the Consumption Decision

Abstract

This paper analyzes the consumption decision, focusing on the degree of substitutability between fungible assets and prospective wealth and on the different risk adjustments associated with different types of prospective wealth. The results reveal substantial differences among these risk adjustments and imply that a dollar of social security wealth substitutes for about three-fifths of a dollar of fungible assets. Although implying that social security wealth reductions would have a positive and sizeable effect on private saving, the results also suggest that such reductions could entail a substantial loss in consumer welfare. Copyright 1992 by The London School of Economics and Political Science.