Social Security and Unsecured Debt [report]

Erik Hurst, Paul Willen
2004 unpublished
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
more » ... g young households from social security contributions (but in both cases requiring higher contributions later) leads to increases in welfare for both types of households and significant increases in consumption, and saving and reductions in debt for optimizing households. * We thank Charlie Brown, Jeff Liebman, Steve Zeldes and seminar participants at the NBER Summer Institute Social Security Working Group for helpful comments and suggestions and Francisco Torralba for excellent research assistance and helpful comments and suggestions. Both authors gratefully acknowledge research support from the Graduate School of Business at the University of Chicago.
doi:10.3386/w10282 fatcat:ffx6lz6oure6vokcskvl6j7loq