| Policy Risk has been a fact for many decades in the case of social security and its presence has many economic implications, especially for the elderly. In spite of that, it has been widely neglected in the retirement literature. A common pattern in the literature is the assumption of invariability and certainty of public programs (i.e. pay-as-you-go), while its investment-based alternatives are assumed risky. In this dissertation I show that benefits, payroll taxes and returns of public programs are far from certain, and that neglecting this fact leads to important analytical shortfalls and different welfare conclusions. Making standard assumptions about preferences and using the history of social security changes in the US, welfare costs could lie between 1.7% and 3.6% of yearly consumption during retirement. People respond to welfare costs by increasing wealth accumulation. Using aggregate US data as well as household data from the Panel Study of Income Dynamics, I find enough empirical evidence showing that people exposed to higher social security risk, respond to it by accumulating more financial wealth. |
